EUROPE - Environmental, social and governance (ESG) data is crucial in the assessment of government bonds, according to Dutch asset manager Robeco.

Rikkert Scholten, senior fixed income portfolio manager, said: "In general, an ESG ranking makes it much easier to have an opinion on a country.

"We make an investment case using ESG data, and while ESG may not always play a dominating role, it is additional information. As a result of our analysis, we sold Italian bonds in June 2011."

ESG is one of three key building blocks in Robeco's country-allocation model, with the other two being debt sustainability and the economic cycle.

It is split in three parts: environmental, social and governance, with governance being the highest weighted with 65%, ahead of social with 20% and environmental with 15%.

Environmental and social issues play a more important role in equities and corporate bonds than in government bonds, according to Scholten.

"The individual weighting depends on the country in question," he added. "While there is not much difference between the higher-ranking countries such as Norway and Sweden, ESG becomes more important, if you move to the lower ranking countries.

"ESG factors have much more relevance in Italy, Russia and emerging markets. A lot of countries do not only score poorly on fiscal and governance but also show a structurally weak growth profile, which can be down to a lack of desire to implement reforms."

But in some cases, an ESG rating does not point out the countries in trouble, as in the case of Ireland.

"Ireland has done very well over the last year due to the implementation of its reforms," Scholten said. "The way it has been dealing with its problems has been good."

ESG research helps Robeco identify the better of two seemingly identical bond issuers, he said.

France, for example, performs significantly worse than the Netherlands on ESG factors such as age-related spending.

Johan Duyvesteyn, quantitative strategies senior researcher at Robeco, said: "While pension reforms in France have been approved, they are not sufficient to solve the public pension deficit.

"Due to a later retirement age and benefit cuts, the Netherlands seems better prepared. As these risks are not reflected in any risk premium, it is best to invest in a similarly priced country with the lesser ESG risk."

He added: "Our research shows a negative relation between our ESG scores and CDS spreads.

"Before the financial crisis, all countries had the same spreads, but the difference between them has become much more apparent now, and this is information you do not get from looking at debt figures alone."

Robeco Fixed Income started analysing ESG factors in 2008.

The data is provided by independent ESG research provider EIRIS, the World Economic Forum, the World Bank, the UN Human Development Index and Robeco's in-house team.

The asset manager is one of a number of investors that have recently included ESG analysis in their assessment of sovereign bonds. Others include MSCI ESG research, German oekom research and AXA IM.

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