Environmental, social and governance (ESG) indicators are integral to PIMCO’s sovereign credit assessments, which inform our investment decisions. But how exactly do we incorporate ESG considerations into our decisions?
In addition to rigorous analysis of ESG and other risk factors, in-country engagement is key for us to gain a holistic sense of broader developments, pinpoint country-specific risks, share in active dialogue with public officials and business leaders, and assess governments’ track records in meeting ESG objectives. We detail our approach in our recent Viewpoint, “Applying ESG Analysis to Sovereign Bonds,” and our experience in assessing South Africa’s sovereign credit, in particular, offers a concrete case study of how active engagement and thorough ESG analysis helps shape portfolio strategy.
ESG sovereign risk case study: South Africa
Political developments in South Africa in 2015–2017 highlight how integrating ESG factors into traditional sovereign credit analysis as well as timely engagement can potentially improve risk assessments and shield portfolios from large downside risks.
In July 2015, allegations of corruption emerged with regard to former South African President Jacob Zuma. Criticism focused on a nuclear energy agreement between South Africa and Russia, which was believed to be engineered for President Zuma’s personal gain to the detriment of a South African public utility. President Zuma was also accused of having a corrupt relationship with the Guptas, a prominent South African business family. A power struggle within the African National Congress (ANC) followed, resulting in a weakening of South Africa’s institutional framework, with frequent changes of finance ministers, fiscal slippage and political turbulence.
When the allegations first surfaced, we initiated a reassessment of South Africa’s political and governance risks, and a senior PIMCO team made a due diligence trip to the country. The objective was to understand the economic and institutional impact as well as the social consequences of the diversion of fiscal resources away from health and education.