The invasion of Ukraine has made investors rethink their exposure towards Russia and step away from the country due to environmental, social and governance (ESG) concerns and the sanctions imposed by many Western governments. However, bond investors are still buying government debt from sovereigns with a worse ESG profile than Russia, which raises hard questions for funds, according to research by global risk intelligence company Verisk Maplecroft.

The 15 hard currency debt issuers that have a worse ESG performance than Russia are Côte d’Ivoire, Egypt, Rwanda, Iraq, Benin, Bolivia, Peru, Angola, Ethiopia, Nigeria, Venezuela, Turkey, Mozambique, Pakistan and Cameroon.

Among the 15 sovereigns are autocratic states and large emerging markets that score poorly across indicators measuring labour rights, human rights and governance.

Although China wasn't one of the 15 countries mentioned in the list, investors' attitudes towards the country, which also draws high levels of criticism over its human rights record, also attracts comment in the report. “Investors’ willingness to step away from Russia, where their hand was forced by sanctions anyway, contrasts with their ongoing involvement in China,” said Eileen Gavin, principal markets analyst at Verisk Maplecroft in a press release.

She added that 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 yields in recent years.

However, Russia and China are not the only problematic countries, according to the report. It also states that Turkey and Egypt have issued more hard currency debt than Moscow and are therefore often more heavily weighted in portfolios than Russia was before the Ukraine invasion.

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The Verisk Maplecroft sovereign ESG ratings show that human and labour rights violations and governance are major issues in both Turkey and Egypt. More specifically, the report reveals that Turkey has a governance score of 1/100, which is the worst of any investable market except Ethiopia. As for Egypt, the country scores 4/100 for reasons related to the erosion of democracy and judicial independence.

In addition, the report states that there are some countries that have ESG profiles that are slightly better than those of Russia overall, such as Saudi Arabia and Indonesia, but are still problematic for any fund manager wanting to claim their profits are principled.

Following the Russian invasion of Ukraine, there has been a number of concerns raised about emerging and frontier market government bondholders’ approach to ESG. However, the report reveals that there has been little change in emerging market portfolios’ holdings in countries that have highly questionable ESG profiles, which poses a future risk for investors.