Integrating ESG in factor-based investing in the sovereign bond markets: a value approach

Abstract

The group report analyses the joint impact of Momentum, Value, Size, and Low Volatility in factor-based investing in sovereign bond emerging and developed markets, develops an ESG factor and assesses its effect across all strategies. This paper focuses on a Value based strategy implemented with OAS and finds that controlling for credit risk is essential to capture positive returns exclusive of OAS. Results show that ESG captures bonds risk premium and allows to better control for risk, presenting a new approach to sovereign bonds market and complementing the already existing literature that shows the impact of ESG on corporate credit spreads.