Sustainability Signals in Sovereign Risk Pricing: Panel Evidence from Emerging Economies

This paper examines whether variations in environmental responsibility, social development, and governance quality are systematically associated with sovereign borrowing costs in emerging market economies, based on panel data analysis. The analysis is based on an annual panel dataset covering the period 2014–2023 for Brazil, Chile, India, Indonesia, Malaysia, Turkey, South Africa, and Poland. Sovereign borrowing costs are measured by sovereign bond yield spreads, calculated as the difference between each country’s 10-year government bond yield and the 10-year US Treasury yield. ESG performance is represented by a composite ESG index as well as its environmental, social, and governance sub-dimensions, constructed using indicators obtained from the World Bank Sovereign ESG Data Portal. The empirical framework employs a two-way fixed effects model to account for unobserved country-specific heterogeneity and common time effects. To ensure robust statistical inference, standard errors are adjusted using the Driscoll–Kraay procedure, which accounts for heteroskedasticity, serial correlation, and cross-sectional dependence. The results indicate that ESG performance has a statistically significant effect on sovereign bond yield spreads. Disaggregated estimations further indicate that the social dimension plays a particularly prominent role in explaining variations in sovereign borrowing costs. In addition, heterogeneity and robustness analyses confirm that the main findings remain largely stable across alternative model specifications. Overall, the findings suggest that ESG performance serves as a complementary risk indicator in the pricing of sovereign borrowing costs in emerging economies. Copyright© 2026 The Author(s). This article is distributed under the terms of the license CC-BY 4.0., which permits any further distribution in any medium, provided the original work is properly cited.Article’s history: Received 23rd of November, 2025; Revised 9th of February, 2026; Accepted 1st of March, 2026; Available online: 15th of March, 2026. Published as article in the Volume XXI, Special Issue, 1(91), 2026.