ESG Integration and Engagement: South Africa Sovereign Credit

Our experience in assessing South Africa’s sovereign credit shows how active engagement and thorough ESG analysis helps shape portfolio strategy.

A version of this material will appear in a CFA Institute paper.

Environmental, social and governance (ESG) indicators are integral to PIMCO’s sovereign credit assessments, which inform our investment decisions. But how exactly do we incorporate ESG considerations into our decisions?

In addition to rigorous analysis of ESG and other risk factors, in-country engagement is key for us to gain a holistic sense of broader developments, pinpoint country-specific risks, share in active dialogue with public officials and business leaders, and assess governments’ track records in meeting ESG objectives. We detail our approach in our recent Viewpoint, “Applying ESG Analysis to Sovereign Bonds,” and our experience in assessing South Africa’s sovereign credit, in particular, offers a concrete case study of how active engagement and thorough ESG analysis helps shape portfolio strategy.

ESG sovereign risk case study: South Africa

Political developments in South Africa in 2015–2017 highlight how integrating ESG factors into traditional sovereign credit analysis as well as timely engagement can potentially improve risk assessments and shield portfolios from large downside risks.

In July 2015, allegations of corruption emerged with regard to former South African President Jacob Zuma. Criticism focused on a nuclear energy agreement between South Africa and Russia, which was believed to be engineered for President Zuma’s personal gain to the detriment of a South African public utility. President Zuma was also accused of having a corrupt relationship with the Guptas, a prominent South African business family. A power struggle within the African National Congress (ANC) followed, resulting in a weakening of South Africa’s institutional framework, with frequent changes of finance ministers, fiscal slippage and political turbulence.

When the allegations first surfaced, we initiated a reassessment of South Africa’s political and governance risks, and a senior PIMCO team made a due diligence trip to the country. The objective was to understand the economic and institutional impact as well as the social consequences of the diversion of fiscal resources away from health and education.

PIMCO’s assessment prompts internal downgrade

Following in-depth discussions with the government and a detailed analysis, we downgraded our internal credit rating for South Africa several quarters before the major rating agencies did (see chart). The weight of the governance indicators within our sovereign ratings, our assessment of the impact of weaker institutions on economic growth and on the country’s debt burden, and our engagement with senior government officials all drove our decision to downgrade.

Our downgrade in turn led us to re-evaluate our portfolio exposure to South African sovereign and quasi-sovereign risk, and led us to make a call to reduce exposure across PIMCO accounts. Due to the integration of ESG factors in our standard sovereign risk framework, we were able to identify problems early and reduce exposure when the markets were still pricing in a favorable scenario for South Africa. Over time, as the extent of the corruption became known, the markets and the rating agencies caught up with our assessment.

Continuous analysis and engagement

From 2015–2017, we remained engaged with the government and key stakeholders in South Africa. This enabled us to better understand the political dynamics and relay investors’ concerns directly to decision makers.

As global macroeconomic conditions improved, the markets started to reprice South Africa positively, but our negative view on governance and transparency led us to remain cautious, particularly as there was a good chance that President Zuma’s policies would continue if his ex-wife, Nkosazana Dlamini-Zuma, won the leadership of the ANC.

With the election of President Cyril Ramaphosa as leader of the ANC in December 2017 and the exit of President Zuma from politics in February 2018, we are monitoring the new government’s progress in correcting management gaps in the state-owned enterprise sector and advancing reforms to improve governance and transparency. The procedures being put in place to reduce corruption are promising signs that South Africa is finally on the long road to recovery.

Learn why we believe the bond market is uniquely suited to both benefit from and provide finance for ESG-related efforts.


The Author

Lupin Rahman

Head of EM Sovereign Credit

View Profile

Latest Insights



PIMCO Europe Ltd
11 Baker Street
London W1U 3AH, England
+44 (0) 20 3640 1000

PIMCO Europe GmbH Irish Branch,
PIMCO Global Advisors (Ireland)
3rd Floor, Harcourt Building 57B Harcourt Street
Dublin D02 F721, Ireland
+353 (0) 1592 2000

PIMCO Europe GmbH
Seidlstraße 24-24a
80335 Munich, Germany
+49 (0) 89 26209 6000

PIMCO Europe GmbH - Italy
Corso Matteotti 8
20121 Milan, Italy
+39 02 9475 5400

PIMCO (Schweiz) GmbH
Brandschenkestrasse 41
8002 Zurich, Switzerland
Tel: + 41 44 512 49 10

PIMCO Europe Ltd (Company No. 2604517) is authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963), PIMCO Europe GmbH Irish Branch (Company No. 909462), PIMCO Europe GmbH UK Branch (Company No. BR022803) and PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The Italian Branch, Irish Branch, UK Branch and Spanish Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority; and (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) in accordance with obligations stipulated in articles 168 and 203 to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication.| PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH- . The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser.

Socially responsible investing is qualitative and subjective by nature, and there is no guarantee that the criteria utilized, or judgment exercised, by PIMCO will reflect the beliefs or values of any one particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and PIMCO is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful. Past performance is not a guarantee or reliable indicator of future results. All investments contain risk and may lose value. Investors should consult their investment professional prior to making an investment decision.

References to specific securities and their issuers are not intended and should not be interpreted as recommendations to purchase, sell or hold such securities. PIMCO products and strategies may or may not include the securities referenced and, if such securities are included, no representation is being made that such securities will continue to be included.

The Race to Net Zero: Challenges and Opportunities
XDismiss Next Article




Please input a valid email address.