ESG Thematic Bonds in Emerging Markets: Risk, Uncertainty, and Ambiguity

ABSTRACT We examine the impact of risk aversion, ambiguity, and uncertainty (geopolitical and economic) on the ESG thematic bond markets in emerging countries. We analyze ESG sovereign (both USD and local currency denominated) and corporate bond markets on the aggregate and regional levels. Increasing levels of risk aversion and economic uncertainty are associated with significant declines in both ESG thematic sovereign and corporate emerging bond returns. On the contrary, ambiguity exhibits a positive impact on bond market returns. Finally, geopolitical risk shows a significant negative relationship only in certain regions. The comparison between ESG and non‐ESG emerging market bonds reveals that uncertainty sources are generally reflected in bond returns in the same way, regardless of the ESG nature of the bonds.