11 January: We study the relation between a country’s performance on the United Nations’ Sustainable Development Goals (SDGs) and its sovereign bond spread. Using a novel country-level SDG measure for a global sample of countries, we find a significantly negative relation between SDG performance and credit default swap (CDS) spreads, while controlling for traditional macroeconomic factors. This effect is stronger for longer maturities, in line with the notion that the SDGs represent long-term objectives. The results are most consistent with perceived default risk driving this relation, rather than investor preferences. In sum, our initial evidence suggests that investing in the SDGs provides governments with financial benefits besides ecological and social welfare.
Do the UN SDGs affect sovereign bond spreads? Initial evidence
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.