March 2024

Client engagement | Client story

Democracy-screened
ESG emerging market
government bond indices“FTSE Russell helped us design a democracy filter for our ESG emerging market
sovereign bond universe. Research shows that better-governed countries havehigher GDP growth rates, while autocratic regimes have a higher probability of
economic failure and higher default rates.”
Philipp Luginbühl, Senior Portfolio Manager, Swiss Federal Pension Fund PUBLICA
Manuela Guillebeau, Sustainability Specialist, Swiss Federal Pension Fund PUBLICA

About the client
ProfileObjectives

Solution

PUBLICA is one of the largest pension
funds in Switzerland, covering thefederal government and associatedorganisations. It has over 68,000 active
members and 42,000 pension recipients.

PUBLICA was seeking to improve its
emerging markets bond index’s
risk/return profile by replacing theincumbent index provider and adding
selected ESG criteria.

The FTSE ESG Democracy Emerging
Markets bond indices incorporate
ESG factors in their design, while
focusing on countries governed bydemocratic principles.

Client engagement | Client story

Client profile
PUBLICA, a non-profit organisation, is one of the largest pension funds in
Switzerland. Covering the federal government and closely associated organisations,
it has over 68,000 active members and around 42,000 pension recipients. As at 31
December 2023, PUBLICA had total assets under management of CHF40.5bn.

The FTSE ESG Democracy
Emerging Markets InvestmentGrade US Dollar Government
Bond Index

PUBLICA uses the term “responsible investment”, rather than “sustainable
investment”, to define its approach to investing pension assets.

The FTSE ESG Democracy
Emerging Markets Local
Currency Government Bond
Index

It takes account of environmental, social and governance (ESG) criteria, exercises
its rights as a shareholder and reduces the CO2 emissions of the properties it owns.
But it believes that investing responsibly does not necessarily mean accepting alower return on its investments, because it needs that return to safeguard thebenefits it pays. Responsible investment allows PUBLICA to improve its risk/return
profile.

Developing new ESG emerging
markets bond benchmarks
Following this principle, PUBLICA’s main investment objective is to improve therisk/return characteristics of its portfolio by selecting appropriate benchmarks forevery asset class it holds. PUBLICA regularly reviews its benchmarks andimplements new ones, when appropriate.

These two indices emerging market
government bonds—one hardcurrency and one local currency—
incorporate tilts towards sovereigns’
environmental, social and governance(ESG) performance.
The indices also incorporate ademocracy filter to determine
countries’ eligibility. It is rules-based,using data from two independentsources: Freedom House and the VDem institute.

As a result of one of its regular reviews, it decided to switch from its incumbent
provider of emerging market bond indices and towards a new provider that could
help it implement certain environmental, social and governance (ESG) goals.
PUBLICA decided that adding relevant ESG criteria to its emerging market
sovereign bond indices could help it enhance the risk/return profile of its
investments. Such an approach would also help it take control of regional
exposures in its emerging market sovereign bond allocation.
In addition, PUBLICA wished to add a democracy filter to its emerging market
sovereign bond benchmarks. This decision reflected academic research showingthat the economic growth rates and currencies of democracies tend to be morestable, while their default rates also tend to be lower.
The implementation of ESG tilts and a democracy filter for emerging market bonds
can be seen as an extension of PUBLICA’s investment approach in developed fixedincome markets, where it uses governance, economic and liquidity criteria todetermine the regional allocation.
PUBLICA set the following objectives for its new emerging markets sovereign bondindex:••••••The benchmark provider should have long-standing expertise in building
government bond benchmarks;
The benchmark provider should follow a rules- and risk-based ESG model;
The provider should enable efficient implementation of the benchmark;The sovereign ESG data underlying the benchmark should have a high level ofquality, availability and frequency;
The democracy screens should be research-based and come fromindependent sources;
The benchmark methodology should be clear, transparent and easy tounderstand.

FTSE Russell

2

Client engagement | Client story

ESG tilts and a democracy filter
FTSE Russell partnered with PUBLICA to design and implement the FTSE ESG
Democracy Emerging Markets Investment-Grade US Dollar Government bondindex and the FTSE ESG Democracy Emerging Markets Local Currency
Government bond index, helping meet these objectives.
These indices are custom versions of the FTSE Emerging Markets Government
Bond index (FTSE EMGBI), FTSE Russell’s flagship benchmark for the world’s
emerging sovereign bond markets.
The FTSE EMGBI follows FTSE’s fixed income country classification process 1,
which classifies bond markets for index inclusion based on a transparent andsophisticated set of accessibility measures.
The FTSE ESG Democracy Emerging Markets Investment-Grade US Dollar
Government bond index and the FTSE ESG Democracy Emerging Markets Local
Currency Government bond index have the following principal design features:•••

They recalibrate FTSE EMGBI country weightings based on the LSEG
Sustainable Sovereign Risk methodology (see the infographic for themodel’s inputs);
They assign equal tilts to sovereign debt issuers’ ESG performance;
They select eligible countries based on independent assessments by
Freedom House, as set out in its annual “Freedom in the World” report (see thechart) and Liberal Democracy index scores by the V-Dem institute.

Beyond Ratings
London Stock Exchange Group’s(LSEG’s) Sovereign Sustainability
Solutions provide the ESG screening
and factor methodology for these new
indices.
LSEG’s Sovereign Sustainability
Solutions enable ESG integration into
fixed income and multi-asset research,
complementing traditional credit
analysis with the goal of assisting
financial sector clients in the transition
towards a sustainable economy.
The solutions are built on in-house
expertise on climate/ESG, data
science, and financial risk
assessment, and cover over 150
countries.
For more on LSEG’s Sovereign
Sustainability Solutions, visit:
LSEG | Beyond Ratings

LSEG Sustainable Sovereign Risk Methodology, used in FTSE Russell ESG bondindices

Source: LSEG Data & Analytics

1

See FTSE Fixed Income Country Classification Process

FTSE Russell

3Client engagement | Client story

After ESG tilts and eligible country selections are applied, individual country weights
are capped at 10 percent of each index. The indices are rebalanced once a monthat the end of the month.

Greater control over long-term risk
and return

Additional information
Further information on FTSE Russell’scomprehensive range of fixed income
indices is available at:
Fixed Income Indices | FTSE Russell

PUBLICA views the key advantages of these new benchmarks as: giving thepension fund more control over the country universe for its emerging market
sovereign bond allocation; and including ESG metrics that can have a material
effect on the willingness and ability of emerging market sovereigns to service theirdebt and maintain stable currencies.
PUBLICA believes that these two factors should help improve the risk/return
characteristics of its emerging market bond portfolio in the long term.

FTSE Russell

4

ABOUT FTSE RUSSELL
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