The world is on an unsustainable path. While the present model of economic development has delivered prosperity to hundreds of millions of people, it has also led to persistent extreme poverty and unprecedented levels of inequality that undermine innovation, social cohesion, and sustainable economic growth. Fossil fuel and natural resource–based economic growth has also strained climate and biodiversity ecosystems as never before, bringing the natural world to the edge of its limits (UN 2019). Our societies are realizing that things cannot continue as they are, and that we must collectively change course and contribute to a more sustainable future for the benefit of generations to come.

The changing behavior is reflected in the world of finance, whereby market participants and investors are increasingly focused on more sustainable financial and nonfinancial outcomes. Investors are becoming more conscious of the effects of their economic footprint and of the benefits of integrating sustainability, mainly by adding environmental, social, and governance (ESG) considerations into investment decisions. Initially focused on equity and corporate bond markets, investors are increasingly integrating an ESG approach into their sovereign debt investment mandates. While the increased issuance of sovereign labeled bonds, such as green and social bonds, is a clear example of changing investor behavior, investors are also increasingly incorporating ESG factors into the fundamental country credit analysis within sovereign fixed income. For the most part, ESG investing in the emerging markets and developing economies (EMDE) space remains focused on the impact of ESG factors on a country’s creditworthiness, with governance seen as the main driver. While ESG investing is hampered by many issues, such as lack of data availability and disclosure and lack of harmonization and standardization, the area is quickly evolving. There has been a rapid increase in assets under management (AUM), developments with new regulatory standards, rising investor interest (such as United Nations Principles for Responsible Investment) and intense policy and political scrutiny as well as commitments.