Do ESG Considerations Matter for Emerging Market Sovereign Spreads?

Carmen Avila-Yiptong, Mahamoud Islam, Ayah Said and Chima Simpson-Bell

No 2025/073, IMF Working Papers from International Monetary Fund

Abstract: This paper aims to investigate the determinants of sovereign spreads for a panel of 79 emerging markets and development economies (EMDEs) over the period 2001-2021, with a particular focus on the role of Environmental, Social, and Governance (ESG) factors. Using panel fixed-effect regressions, our results show that improvements in ESG factors tend to reduce sovereign spreads, alongside domestic variables capturing growth, fiscal and external balances, and global factors such as U.S. interest rates and changes in global risk sentiment. In particular, we find that governance is a key factor in explaining movements in sovereign spreads, including perceptions of government effectiveness, regulatory quality, and the control of corruption. Social and environmental aspects, proxied by population purchasing power and greenhouse gas emissions, respectively, also play significant roles. Our contribution to the literature is threefold: first, we confirm the results of previous papers on the relevance of ESG in explaining emerging market spread movements; second, we delve deeper by unpacking the elements that matter most within ESG factors; and third, we construct an aggregate ESG indicator using principal components analysis to summarize its overall impact.

Keywords: Sovereign spreads; emerging markets; ESG; ESG consideration; aggregate ESG indicator; ESG factor; ESG index; ESG variable; Corporate social responsibility; Emerging and frontier financial markets; Climate change; Greenhouse gas emissions; Global (search for similar items in EconPapers)
Pages: 31
Date: 2025-04-11
New Economics Papers: this item is included in nep-env and nep-fdg
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