ESG equities have been under fire — but ESG bond funds appear more resilient: While some investors have turned their backs on ESG-focused equity funds amid greenwashing criticism, ESG funds that track bonds don’t appear to have been tarred with the same brush.

The difference in performance between ESG equities and bonds has been stark this year: Between January of this year and the end of April, ESG bond funds (spanning both corporate and sovereign debt) saw some USD 7.4 bn in inflows, while non-ESG funds hemorrhaged some USD 168 bn, according to a Bank of America (BoA) report cited by the Financial Times. By contrast, investments into ESG equity funds fell 36% during 1Q 2022 and further in April — “the worst showing since before the pandemic began,” BoA analysts said — as investors in ESG equities lost faith that asset managers are really investing ethically.

Now ESG ratings agencies are pointing out that when it comes to sovereign debt, investors would do well to pay closer attention to ESG-related risks: Russia has become a cautionary tale, after the value of its sovereign debt plummeted immediately following the invasion of Ukraine. But consulting firm Verisk Maplecroft had identified a mismatch between its listing value and how the country was faring along its ESG metrics (hint: pretty poorly) that predated the war, the FT notes. Investors wouldn’t have ended up out of pocket if they hadn’t been “complacent” about the ESG risks inherent in Russian sovereign debt, Verisk argues.

There are a bunch of other bonds investors should be concerned about, Verisk says — and we’re one of them. Fifteen bond-issuing countries including Egypt, Turkey, Peru, and Nigeria all score worse than Russia on Verisk’s ESG metrics. Turkey, for example, scores very low because of labor rights problems, food security issues and judicial weakness.

The MENA region doesn’t do well overall: Poor scores for Egypt and Tunisia are “part of a broader picture across MENA of markets that are persistently poor, or deteriorating, on ESG,” Verisk says.

This isn’t about judging which countries are “ethical,” proponents say, but about managing risk and maximizing returns. Verisk says high ESG scores are indicative of higher returns on countries’ sovereign bonds. And even where returns are similar across bonds, those with better ESG credentials present lower volatility, JPMorgan researchers have found (pdf).