Key takeaways:
Effective sovereign engagement requires a 360-degree approach, involving governments, central banks, and diverse stakeholders for deeper insights.
Successful engagement depends on carefully aligning with political cycles and choosing the right timing for maximum impact.
Addressing ESG factors and biodiversity is increasingly integral to investment strategies, fostering sustainability through collaboration and stakeholder education.
Sovereign engagement is a critical component of the investment process. It helps us address data gaps, develop more informed investment perspectives, and enhance risk assessments. It is a key differentiator of an active investment approach. We believe that human interaction cannot simply be replaced by quantitative tools or artificial intelligence (AI).
To conduct sovereign engagement effectively, we advocate adopting a 360-degree approach. This means engaging not only with the government and/or the central bank but also with all major stakeholders in a given country. However, sovereign engagement does not come without challenges. Investors must be highly sensitive to political cycles and carefully choose the timing of their engagement to maximize impact and effectiveness.
Sovereign engagement is essential across the full spectrum of countries—not just frontier markets, which may be less researched, but also investment-grade countries. Let me provide a few examples from our investment universe.
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Take the UAE (United Arab Emirates), for instance. This AA-rated credit comprises several emirates that are active in the international bond market, where economic data can be difficult to obtain. For this reason, it is crucial for investors to maintain regular engagement with debt management offices (DMOs), government representatives, the International Monetary Fund (IMF), and credit rating agencies.
Another excellent example of sovereign engagement is our February 2025 trip to Jakarta, Indonesia. Indonesia is an investment-grade-rated credit with a strong track record of fiscal prudence. While it might be tempting to underestimate the importance of face-to-face contact with authorities and stakeholders in such a context, we found our week-long visit to Jakarta to be extremely valuable. During this trip, we gathered critical information that helped us better understand the opportunities and challenges facing the new administration of President Prabowo as it works to realign the economy with its strategic priorities.
We planned the timing of this engagement carefully. Indonesia held general elections in 2024, and we deliberately chose not to engage during the transition period. Instead, we prepared for our trip, which took place in February of this year, when the new administration was fully established, had finalized its plans, and was ready to engage with investors.
As part of our 360-degree approach, we did not limit our engagement to the government, its ministries, the central bank, and regulators. We conducted over 15 meetings with key stakeholders across the country. These included non-governmental organizations (NGOs), international embassies, banking regulators, local stock exchanges, and chambers of commerce, among others. Furthermore, our discussions extended beyond economic issues.
In fact, the primary reason for our visit to Indonesia was to engage with the government on the importance of biodiversity for international investors. We organized this trip in collaboration with the Investor Policy Dialogue on Deforestation (IPDD), a joint initiative of over 80 investors managing more than $10 trillion in assets. The initiative aims to mitigate and address deforestation risks in key countries, including Indonesia.
It was reassuring to witness the extensive efforts being made as part of Indonesia’s sustainable finance roadmap. These efforts include the development of a local carbon market, initiatives to educate the corporate and banking sectors on the importance of environmental, social, and governance (ESG) factors, and nature-related disclosures, among other measures.
The trip proved to be mutually beneficial. We shared our expertise during a workshop at the local stock exchange for major listed corporations, where we emphasized the importance of ESG and nature-related disclosures. Additionally, we organized a workshop with major local banks to explain how we integrate ESG and nature-related disclosures into our investment process.