1. SUSTAINABILE FIXED INCOME:A SOVERIEGN RESPECTVE
1.0 Introduction
Fixed Income remains a challenging asset class for the integration and compliance
with the United Nations Principles Of Responsible Investing:
 We will incorporate ESG issues into investment analysis and decision-making
processes.
 We will be active owners and incorporate ESG issues into our ownership policies
and practices.
 We will seek appropriate disclosure on ESG issues by the entities in which we
invest.
 We will promote acceptance and implementation of the Principles within the
investment industry.
 We will work together to enhance our effectiveness in implementing the
Principles.
 We will each report on our activities and progress towards implementing the
Principles.
The financial crisis of 2008 resulted in an unfavorable amount of market volatility
institutional investors, which spread to Europe creating the euro crisis. Investors now
understand that the developed nations sovereign bonds can be as volatile as emerging
nations. Investors are now requiring more research and analysis. ESG is added dimension
to global risk analysis. Institutional investors are increasingly demanding the application
of ESG analysis to sovereign bonds as a criteria for appointing asset managers.
ESG factors can be material to both creditworthiness and investment performance. Given
these compelling results, the challenge to others is to act on the information that is
increasingly available. Global government debt total $225 Trillion or 25% of all financial
assets. Sovereign bonds represent approximately $47 Trillion of the market size. Bonds
or fixed income on average are 34% of large major funds total assets.
2.0 UNPRI
UNPRI Fixed Income working group Sovereign Bonds ESG Factors:
ENVIRONMENTAL
Climate change
Water resources and pollution
Biodiversity
Energy resources and management
Biocapacity and ecosystem quality
Air pollution
Natural disasters
Natural resources

2. SOCIAL
Human rights
Education and human capital
Health levels
Political freedoms
Demographic change
Employment levels
Social exclusion and poverty
Trust in society / institutions
Crime and safety
Food security
GOVERNANCE
Institutional strength
Corruption
Regime stability
Political rights and civil liberties
Rule of law
Regulatory effectiveness and quality
Accounting standards
Government finances
Economic strength
Economic growth prospects
Balance of trade
Fiscal performance
3.0 INTANGIBLE VALUE ASSESSMENTS
3.1 MSCI ENVIRONMENTALSOCIAL AND GOVERNANCE
(ESG).
MSCI is a leader is ESG rating. Below are key factors for ESG sovereign ratings.
The recent debt ceiling and risk of default crisis in America has highlighted the
governance factor of sustainability risk. Needless to say that the European Economic
crisis remains a concern.
3.1.2 ENVIRONMENTAL RISK
Sovereign Environment factors have been an historical challenge. Many nations believe
that negative environmental externalities, is a by-product of economic growth and
prosperity. Positive environment externalities are often viewed as a developed nations
luxury after decades of negative externalities. These nations have a difficult time
managing environmental risk. Accentuating this challenged is the fact that many fast

3. growth economies are natural resourced based economies. Much of the corruption that
spells over into the general governance is due to the mining and resource extraction by
developed nations. This is also an impediment to renewable energy development.
Negative environmental externalities may create short-term wealth while compromising
long-term sustainability.
 Contribution To Competitiveness
Availability of natural resources provides long-term competitive advantages to a
country, so long as those resources are sustainably managed. High vulnerability to
natural hazards and environmental externalities may require affected countries to
devote financial resources towards addressing these hazards and externalities.
 Time Horizon of Risk/ Opportunities To Materialize
In general, opportunities and risks related to natural resource availability and
management are expected to materialize over the long term (>5 years).
However, the economic risks to countries facing acute resource
shortages may impede growth and affect trade balances in the short term.
 Main Risks and Opportunities
Energy Security, Water Security, Food Security; account
balance;
human capital (health) and natural environment;
government outlays due to natural hazards.
3.1.3 SOCIAL RISK
Weak civil liberties and high unemployment trigger civil unrest among the countries with
limited political rights and civil liberties countries with high unemployment rates were
more likely to experience civilian unrest than countries with low unemployment rates.
This suggests that social factors – in addition too political and culture factors – played a
significant role in these events.
Many of the countries experiencing violent conflict in the last five years had ranked
poorly on social criteria prior to their respective conflicts, indicating that analysis of
social performance may help investors anticipate future conflicts or risk.
 Contribution To Competitiveness
A country’s long-term competitiveness is affected by its ability to develop a
healthy, productive, and stable workforce and to create a supportive economic
environment.
 Availability of balanced, healthy and productive human capital may provide long-
term competitive advantage to a country by moving it up in value chain and
generating more revenue from high-technology products and knowledge intensive
industries. A conducive economic environment is a pre-requisite for effective
utilization of human capital.

4.  Time Horizon Of Risk/ Opportunities To Materialize
Development of human capital is a long process and requires
significant investment, and the benefits are realized over the long term.
Nonetheless a prolonged unfavorable economic environment may accelerate
materialization of this risk.
 Main Risks / Opportunities
Labor productivity, employment, economic growth;
high value-
Future government outlays on social programs;
political risk, regime change. Availability of natural resources provides long-term
competitive advantages to a country, so long as those resources are sustainably
managed.
3.1.4 GOVERNANCE
Countries in developed markets generally showed the strongest Political Governance
(measuring institutions, stability, corruption control, civil liberties, and political
freedom), but weaker Financial Governance due to higher public and external debt levels
often offset this. European countries facing fiscal crisis scored lowest on Financial
Governance, but also continue to rank poorly on Corruption Controls. Meanwhile, select
countries in Africa and Latin America exceeded expectations in the area of Political
Governance, signifying promising long-term investment opportunities.
 Contribution To Competitiveness
A country’s governance and institutional capacity supports political and economic
stability and underpins the functioning of its financial, judicial, and political
systems. Weak political governance may restrict a country’s ability to effectively
develop and utilize its resources (natural resources, human capital and financial
resources), which ultimately affect its competitiveness. Similarly, weak financial
governance may affect a country’s management of environmental and social risks,
and constrain its ability to invest in priority areas such as human capital
development, infrastructure, healthcare and social security.
 Time Horizon Of Risk
Strong political and financial governance are pre-requisites for effective
utilization of resources. Any change in political or financial governance may
immediately affect a country’s competiveness.
 Main Risk/Opportunities
Inefficient allocation and mismanagement of resources.
An environment of uncertainty affecting investment.
Increased social risks leading to civil and political unrest.

5. 3.2 PORTER DETERMINANTS
Porter used the term ’determinants’ in his original work but subsequent authors have used
‘sources’ ‘elements’ and ‘characteristics’ to mean the same thing.
3.2.1 Factor Endowments
There are two kinds of factor endowments - the basic factors of production such as land,
labour, capital and materials; and advanced factors such as technological know how,
managerial skills and physical infrastructure.
3.2.2 Demand Conditions
Demand conditions are relevant in creating pressure for innovation and quality. Domestic
demand pressures are especially relevant in forcing companies within a country to
improve their competitiveness. Porter claims that the more sophisticated and demanding
domestic customers are, the more competitive domestic organisations are likely to be..
3.2.3 RelatedAnd Supporting Industries
These give companies an additional boost to their international competitiveness. When
suppliers are located near the producer, these firms can provide lower cost inputs that are
not available to the producer’s distant competitors. Being geographically close to
suppliers also aids the sharing of information between supplier and producer.
3.2.4 Strategy, Structure And Rivalry
Organisational strategy, structure and rivalry are also very important in the promotion of
international competitiveness. Porter argues that strong domestic rivalry in a country
promotes fitness to compete rather like athletes training for the Olympics. Only by
competing with the best at home can one hope to compete successfully at the global level.
The strategy and structure of organisations is also influenced by the management style
and culture of the country in which they are located and Porter noted that no single
management style guaranteed success.
The four determinants of national advantage covered above shape the competitive
environment of industries but chance and government policies also play a role.

6. 4.0 INTANGIBLE VALUE ASSESSMENTS:CREDIT RATINGS:
Major Credit Rating Agency Sovereign Risk analysis focuses on four broad factors:
4.1 ECONOMIC STRENGH
The first factor we consider is a sovereign’s Economic Strength. The intrinsic strength of
the economy – focusing on growth potential, diversification, competitiveness, national
income, and scale – is important in determining a country’s resilience or shock-
absorption capacity. A sovereign’s relative ability to generate revenue and service debt
over the medium term relies on fostering economic growth and prosperity.
 Growth Dynamics
Recent performance and medium-term outlook for real GDP growth.
Volatility in the rate of recent real GDP growth. Competitiveness and innovation
utilizing the World Economic Forum (WEF) Global Competitiveness Index
 Scale Of The Economy
Scale is also an important driver of creditworthiness. A very small, but very rich
country can be subject to an abrupt change of economic fortune. By contrast, a
larger, more diversified economy has a higher capacity to generate sufficient and
stable revenues for a sovereign to service outstanding debt. The key indicator for
the scale of an economy is the measure of its nominal GDP. This can be
complemented by an assessment of structural factors that point to long-term
robustness.
 National Income
Dividing the measure of economic output in a country by the population provides
a measurement of the income level of a country’s citizens. High income is
generally closely correlated with a low risk of default. National income is
measured by GDP per capita in purchasing power parity terms. GDP per capita is
given a one-quarter weighting in the methodology scorecard for economic
strength.
4.2 INSTITUTIONALSTRENGTH
The country’s institutional features are conducive to supporting its ability and willingness
to repay its debt. A related aspect of Institutional Strength is the capacity of the
government to conduct sound economic policies that foster economic growth and
prosperity.
Institutional Framework And Effectiveness
 Government Effectiveness: The most relevant features of this World Bank
governance indicator are the quality of governmental bureaucracy and
administration. It also attempts to capture policy planning, implementation
capabilities, and the independence of the public service from political

7. interference. An aspect, which is of particular interest, is a measurement of the
quality of budget management.
 Rule of Law: The features of this World Bank governance indicator, which are
the measurements of contract enforcement, property rights, the independence of
the judiciary and trust in the judicial system. All of these elements are essential
for a well-functioning economic system.
 Control of Corruption: The relevant features of this World Bank governance
indicator are the extent to which public power is exercised for private gain, as
well as the capture of the economy by elites, the bureaucracy or special interests.
Transparency and the accountability of the public sector is a key focus of this
indicator.
Policy Credibility And Effectiveness
 Inflation Performance: We chose this as our main proxy for policy credibility
and effectiveness because sustainable economic growth and prosperity are best
achieved with price stability. Inflation is also a determinant of an economy’s
competitiveness. Inflationary episodes are often a precursor to economic and
political instability given that inflation acts as a tax on the less well-off members
of a society. We recognize that high inflation erodes confidence in the function of
a domestic currency as a store of value. This has contributed to capital flight and
to currency and balance-of-payments crises.
 A deflationary environment also reflects adversely on a central bank’s
capabilities. Hence, deflationary developments – which typically go along with
subdued or negative real growth and an increase in the debt-to-GDP ratio – are
also credit-negative.
 Thus, the credibility of a central bank or monetary authority is a key element in
ensuring financial and economic stability. We attempt to measure this sub-score
of the institutional methodology factor through a simple measurement: the
inflation track record.
 Another aspect of policy effectiveness is an assessment of the scope and
capability of central banks to intervene in the financial system during a crisis. We
believe that a low-inflation environment allows greater flexibility for a central
bank to intervene in a time of economic stress. Recently, this has been
demonstrated by the extraordinary expansions of major central bank balance
sheets in response to the global financial crisis.
 Inflation Volatility: This indicator adds another dimension to inflation
performance and offers additional insight into the institutional strength of a
country’s central bank. Inflation volatility is associated with a high degree of
monetary policy uncertainty and an inability of the central bank to control

8. inflation, either because of structural economic features, institutional
shortcomings, or widespread price indexation.

9. 5.0 FISCAL STRENGTH
Fiscal Strength, captures the overall health of government finances. The starting point to
assess relative debt burdens (debt/GDP, debt/revenues) and debt affordability (interest
payments relative to revenue and GDP). The structure of government debt is taken into
account. Some governments have a greater ability to carry a higher debt burden at
affordable rates than others.
More than a third of sovereign defaults have occurred as a result of persistent external
and fiscal imbalances, which have, over time, built up an unsustainably high debt burden.
These defaults were typically characterized by a slow build-up of debt, a dependence on
external creditors, and/or a deterioration in debt affordability in particular (which is much
better correlated with past default experience than debt-to-GDP) over many years, as a
result of external terms-of-trade shocks or unsustainable government fiscal policies. The
defaults themselves occurred at very high debt-to-GDP and debt burden levels, which
countries were ultimately unable to service or reduce.
Key Indicators
Debt Burden
 General Government Debt/GDP: This ratio is the starting point of our
assessment of Fiscal Strength. We recognize that the level of debt alone does not
determine whether a sovereign will face default: indeed, while past instances of
sovereign defaults have been correlated with rising debt burdens, a high debt-to-
GDP ratio is neither a necessary nor a sufficient condition for sovereign default.
Nevertheless, it is a necessary starting point. The ratio considers the gross debt,
including direct debt of the central government and all regional and local
governments. In the case of federal systems with a division of fiscal
responsibilities, we also separately analyse central government debt.
 General Government Debt/Revenues: This ratio gives a rough indication of the
repayment capacity of the sovereign’s actual revenue base. A high ratio, however,
may reflect legacy fiscal weaknesses or the fiscalization of contingent liabilities
which previously had no claim on government revenues to service debt. Such a
situation will force a government to tighten fiscal policy and reduce its deficit.
Otherwise, debt accumulation will disproportionally burden future generations of
taxpayers.
Debt Affordability
 General Government Interest Payments/Revenue: This ratio indicates the
degree to which a government’s debt service burden is within its revenue-
generation capacity. It also reflects the willingness of its creditors to finance
government deficits with or without demanding a risk premium. A high ratio
means that a large share of revenues will be diverted to meeting interest
payments. The implications are both fiscal and economic. A large interest burden

10. will not only tend to result in relatively large fiscal deficits, but it will also
constrain public-sector capital expenditure in the budget. The latter has negative
implications for long-term economic growth.
 General Government Interest Payments/GDP: This ratio expands upon the
debt service-to-revenue analysis beyond the immediate capacity of fiscal revenues
to the broader capacity of national income and output to meet government debt
service requirements.
7.0 SUSCEPTIBILITY TO EVENT RISK
This factor assess the government’s ability to withstand shocks from a medium-term
perspective, this fourth factor denotes the risk that sudden, extreme events may severely
strain public finances, thus sharply increasing the sovereign’s probability of default.
 Political Risk
The two dimensions of Political Risk: risks that arise from domestic politics and
political instability, and risks that are geopolitical. Both kinds of Political Risk
may increase a country’s probability of default.
 Government Liquidity Risk
Government Liquidity Risk reflects the risk that a sovereign issuer lacks the
liquidity to service its debt.
 Fundamental Metrics
Gross Borrowing Requirements relative to GDP depict the size of the sovereign’s
funding needs: with all else being equal, the larger the borrowing requirements,
the higher the sovereign’s susceptibility to liquidity risk. The share of the General
Government Debt that is held by non-residents is also an instructive indicator in
times of market stress:16 the higher the share of foreign investors, the less captive
the sovereign’s investor base, and hence the higher its liquidity risk.
 Market Funding Stress
 Moreover, funding stress on a government’s bond market reflects elevated
liquidity risk for the respective sovereign. Market-based measures of default risk
(such as CDS prices or bond-implied ratings) are informative indicators in this
regard..
 Banking Sector Risk And Other Contingent Liabilities
 Contingent liabilities (CLs) are off-balance sheet liabilities that may migrate onto
the government’s balance sheet depending on the occurrence of specific events.
 » Strength of the Banking System:
 » Size of the Banking System:
 » Funding Vulnerabilities

11. 8.0 EXTERNAL VULNERABILITY RISK
For some countries, it is not sufficient to mobilize resources in local currency: to repay
foreign- currency-denominated debt, they need to take the extra step of obtaining hard
currency in exchange for their local currency funds. Countries that do not spontaneously
generate hard currencies because they have a current account deficit and/or net capital
outflows experience a shortage of hard currency – and this is reflected in a depreciating
exchange rate and diminishing official foreign reserves. These countries are “balance-of-
payment-constrained,” irrespective of whether or not the government can easily mobilise
local-currency funding to repay the debt. A government may also constrain itself in terms
of the use of the currency exchange rate as an adjustment mechanism, for example by
committing to a currency board.
1. Current Account Balance (CAB) and Foreign Direct Investment (FDI):
2. External Vulnerability Indicator (EVI):
3. Net International Investment Position (NIIP):
Intangible value assessments are not new in investment analysis. Intangible
assessments have a history in asset management. Michael Porter’s competitive
advantages of nations are a good intangible assessment of sovereign risk.
SUSTAINABILITY MOODY'S
EGG PORTER CREDIT
FACTOR FACTORS DETERMINANTS FACTORS
ENVIRONMENTAL
Climate
Change
Factor
Endowments
Susceptibility To
Event Risk
Energy Resource
Management
SOCIAL
Employment
Political
Rights
Related
Supporting
Industries
PolicyCreditably And
Effectiveness
Demand
Conditions

12. Quantifying The Tangible and Intangible Fixed Income Value Assessments
Duration A Systematic Risk Assessment
Duration is the most commonly used measure of risk in bond investing. Duration
incorporates a bond's yield, coupon, final maturity and call features into one number,
expressed in years, that indicates how price-sensitive a bond or portfolio is to changes in
interest rates. There are a number of ways to calculate duration, but the generic term
generally refers to effective duration, defined as the approximate percentage change in a
security’s price that will result from a 100-basis-point change in its yield.
Spread Duration: This estimates the price sensitivity of a specific sector or asset class to
a 100 basis-point movement (either widening or narrowing) in its spread relative to
Treasuries. For example, corporate spread duration considers the widening or narrowing
of the spread over LIBOR in floating-rate notes. The spread duration for fixed-rate
corporates is the same as standard duration.
Modified Duration (sometimes abbreviated MD) is a price sensitivity measure, defined as
the percentage derivative of price with respect to yield. Modified duration applies when a
bond or other asset is considered as a function of yield. In this case one can measure the
logarithmic derivative with respect to yield:
It turns out that when the yield is expressed continuously compounded, Macaulay
duration and modified duration are equal.
First, consider the case of continuously compounded yields. If we take the derivative of
price or present value, expression (2), with respect to the continuously compounded yield
we see that:
GOVERNANCE
Economic
Strength
Strategy,
Structure
And Rivalry
Economic
Strength
Institutional
Strength
Institutional
Strength
Financial
Strength

13. In other words, for yields expressed continuously compounded,
.[1]
where:
. indexes the cash flows,
. is the time in years until the payment will be received,
. is the present value of all cash payments from the asset.
It follows”
P
dP
= (modified duration)(dy).
Substituting spread duration for modified duration to approximate the percentage price
change for a given change in the yield we get:
P
dP
= (spread duration)(dy).
The yield on bond is a function of risk. The spread is the risk premium above the risk
free rate .
Duration measures the risk of bonds to changes in interest rates.
Spread duration measures the risk of bonds to changes in credit and or ESG.
The expected return on a bond is reflected in the yield.
Yield f( Interest Rate Risk, Credit Risk, and ESG Risk)