Sovereign debt governance levels plummet

A new study by Insight Investment found governance standards at sovereign debt issuers are falling

Governance standards of “most” sovereign debt issuers deteriorated in recent months, according to a new report by Insight Investment.

The Sovereigns and Sustainability report, published on Monday, showed that more than half of developed market countries now have a negative governance momentum score.

For developed markets, the deterioration in governance levels was attributed to “economic weakness compounded by austerity policies,” with analysts noting that some nations now have governments that have “weakened some institutions.”

Looking at the governance metric in isolation, New Zealand came out as the best performer, with no governance red flags across 24 datasets, although the researchers noted that the country could still make improvements to its regulatory environment.

Afghanistan was the worst performer on governance measures, with the worst possible score in 20 out of the 24 governance metrics. Analysts highlighted corruption, political instability, ineffective government, poor quality regulation and a lack of basic rights as major issues influencing the score.

The report’s findings come as Insight unveiled its new sustainability risk model which weighs up how environmental, social and governance factors affect sovereign debt portfolios.

The Insight Sustainability Risk Model maps sustainability and individual country risk and is a response to a growing backdrop of “rising political and economic uncertainty,” the asset management group said in a statement.

Insight’s senior ESG analyst, Joshua Kendall noted that most ESG fixed income monitoring metrics tend to focus on corporate debt issuers.

He said: “Sovereign debt investors need more information to make informed decisions about the extent to which ESG factors are reflected in market prices.

“We developed this model in response to client interest and expect to refine it over time as the quality and quantity of third-party research and data grows.”