The traditional relationship between sovereign bond spreads and macroeconomic fundamentals appears to be weak since the financial crisis. In search of additional determinants, scholars shifted their attention toward intangible factors related to ESG dimensions. Country ESG ratings are used to measure a country’s sustainability level, but often solely provide information about a country’s policy toward these intangible factors. We believe that the SDGs can provide a better measure for sustainability of a country. The strength of the U.N. SDGs is that all goals are interlinked; governments are unable to cherry-pick their favourite goal. Unlike ESG ratings, the SDGs can be seen as a measure of the transition of the country toward full sustainability and are therefore output- and future-oriented. In addition, the SDGs are a direct measure of a government’s pledge to achieve social inclusion and environmental protection by 2030.
We use the dataset of the latest Sustainable Development Report, which includes an overview of countries’ performance on the SDGs to investigate the impact of SDG performance on sovereign bond spreads. We will use a broad range of low- and high-income countries to capture government bonds issued in different currencies. We are interested in the governments that are unprepared will increase the risk of unforeseen future SDG-related government expenses. An increase in government expenditures will negatively impact a government’s budget and its likelihood to repay its debt. Investors may demand to be compensated for this higher perceived country risk, influencing borrowing costs for governments.