Turkey and Egypt have issued more hard currency debt than Russia and are therefore more heavily weighted in portfolios than Russia was before it invaded Ukraine in February.
However, the group pointed out both are examples that performed worse than Russia on ESG and performed remarkably poorly on human and labour rights violations and governance in particular.
Turkey scores 1/100 on governance with spreading corruption and weakening judicial independence, while Egypt scores 4/100 with democracy and judicial independence being eroded.
This year’s “macro storm” may make things harder for sovereigns with poor ESG scores, according to the researchers, including for Turkey.
They noted Ankara’s “heterodox approach to monetary policy”, alongside its institutional decline, has made it a high political risk environment in the face of macro pressure we are seeing.
Tensions ahead of elections expected in 2023 are also contributing to the heightened political risk which Verisk Maplecroft suggests is not being accurately reflected in the price at which Turkey’s sovereign debt is being traded.
Egypt has been performing persistently poorly on ESG and, along with Tunisia, is on the group’s civil unrest watchlist this year due to surging food and energy prices.
Reassessing the stalwarts
Verisk Maplecroft also said other issuers regularly seen in portfolios but with only marginally better scores than Russia – including China, Saudi Arabia and Indonesia – merit fresh scrutiny.
According to the researchers, improvements in governance in Saudi Arabia have come “at the expense of civil rights and freedoms, repression of dissent and crime, and tighter controls on sources of instability.” It notes the country is in the weakest cluster for institutional strength and human rights.
Eileen Gavin, principal markets analyst at Verisk Maplecroft, commented on China’s ESG rating: “Investors’ willingness to step away from Russia, where their hand was forced by sanctions anyway, contrasts with their ongoing involvement in China.
“China’s complex and often problematic ESG situation is first and foremost an issue for Western corporates and their investors, but sovereign bonds and state-backed entities have also been a source of scarce high yield in recent years and remain a fixture of portfolios.”
Head of markets at Verisk Maplecroft, James Lockhart Smith, said: “Geopolitical shifts suggest that the previous assumption that all emerging markets in a portfolio can be gradually prodded into alignment with the values of ESG investors no longer holds.
“This, taken in combination with new regulations in Europe (and soon in the US) demanding that funds do ‘what they say on the tin’, means that something’s got to give, sooner or later.”