Sovereign bonds issued by countries that respect high standards in how organisations are run and respect the environment make far more money for investors than those countries that fail in such “sustainability”, according to research from Sarasin, the Swiss private bank.

In a report implicitly chiding nations such as China – seen as a “non-sustainable” country - it noted that bonds issued by “sustainable” nations outperformed, in total return terms (in dollars) their unsustainable peers by 27.3 percentage points from the end of 2008 to the end of 2011. The gap shrank to 12.4 per cent during 2012, but the margin is still significant, the bank said. In examining emerging market bonds and sustainability, the gap at one point reached 77 percentage points at the end of December last year.

The Swiss bank’s focus on “sustainability” is part of a trend of financial institutions reacting to client fears about the environment, waste of natural and man-made resources, or dissatisfaction with poorly managed businesses. There remains debate in the industry on whether screening and seeking out firms for their “sustainability” qualities enhance returns over the long run. On the one side, advocates say it cuts risks of shareholder losses by avoiding potential scandals and disasters. On the other side, some investors say shunning sectors such as tobacco or forms of power generation like coal drags returns down. There is also an issue of whether “sustainability” is a direct cause of superior returns or merely correlated with them.

Sarasin says there is a causal link between sustainability and returns. It has argued previously: "By issuing bonds, governments undertake to accept an immediate payment from investors today, in return for making interest payments and a final capital repayment at some point in the future. Their ability to meet the promised payments depends to a large extent on their future tax receipts. This requires a sustainable tax base, which needs to be present mainly in the form of future goods and services. This in turn depends on a country’s available resources and its efficiency in converting these resources into goods and services. A nation's ability to meet its future payment obligations – in other words its credit standing – is therefore closely connected to its productive capacity over the long term."

Definition

In an explanation of what it means by sustainability, Sarasin told this publication: “As a maxim for decision-making, we aim to achieve a lasting balance of our commercial, social and ecological responsibility. From experience, we are convinced that this is the best way of combining the interests of our clients, our employees and our shareholders with our social responsibility.”

The sustainability test is notable when applied to emerging economies, such as China and Indonesia, the report said.

“Apart from a short period during the peak of the financial crisis in 2008, the government bonds of sustainable emerging countries such as Brazil, Peru and Indonesia have clearly outperformed those of non-sustainable countries such as China and South Africa,” the report said, adding: “The [performance] differential peaked at the end of December 2012, with an outperformance of 77 percentage points.”