The Impact of ESG Implementation on the Sovereign Bond Yield Spreads: An Empirical Analysis of ASEAN Countries

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INTRODUCTION
A sovereign bond is a type of debt security issued by a government to raise money from investors.It is frequently used in developing countries to fund infrastructure projects, social programs, and other government initiatives.In comparison to developed countries, developing countries' sovereign bond markets are also small and illiquid.As a result, large quantities of sovereign bonds may be difficult to buy or sell in these markets, making them less appealing to investors [70].Because of weaker economies, less developed financial markets, and higher levels of political and economic insecurity, sovereign bonds issued by developing countries can be riskier than those issued by developed countries.The Association of Southeast Asian Nations (ASEAN) is a regional organization comprised of developing nations such as Indonesia, Malaysia, Philippines, Thailand, and Vietnam.Some ASEAN countries have actively issued sovereign bonds in international capital markets to gain access to a broader pool of investors, diversify funding sources, and reduce reliance on domestic banks.However, sovereign bond issuance varies significantly across the region, with ASEAN countries having fewer opportunities to raise funds through bond issuance due to high sovereign risk and investor interest.Implementing ESG can help a country reduce its sovereign risk while also encouraging investors to invest.In ASEAN countries, ESG criteria in sovereign bonds are still in their early stages, but they have gained traction in recent years.However, challenges remain in the implementation of ESG criteria, such as a lack of standardization, data availability, and investor awareness and understanding of ESG risks [71].To address these issues, governments and investors should collaborate to improve data availability, strengthen the legal and regulatory framework, and encourage the adoption of international standards.
ESG factors can have a significant impact on a sovereign bond issuer's credit risk and long-term performance.There is a wealth of economic literature that investigates the interdependence of sovereign credit risk, economic development, environmental resources, social welfare, and governance [53].Natural resources such as land, water, and minerals are critical for economic growth, but their depletion can harm the economy and increase the risk of sovereign debt.Social welfare and governance also have an impact on an economy's health, with good governance protecting human rights and the rule of law and bad governance causing social unrest.Depletion of natural resources can reduce economic growth, sovereign credit risk, and social welfare, creating a vicious circle.Governments must understand and address these interconnections in order to ensure long-term economic growth and development.sampling can be defined as non-probability sampling technique when the researchers choose the sample based on their knowledge and purpose of the study.This research uses data from verified website and by library research to find theoretical foundation.Library research is finding theories that suitable to achieve objective in academic sources.Data Panel Regression Panel data regression is a regression data analysis using cross-sectional and time-series data to estimate both within-unit and between-unit effects.
The author uses this regression model by following the previous research done by [26], but then the author modified the model in order to answer the research question by adding variables such as corruption index and pandemic in order to adjust the situation of the object research.According to this object research, the majority of countries are developing countries, with corruption being a major challenge that may influence the bond yield spread.Because the time period of this object research is over the pandemic, there is a possibility that the impact of the Covid-19 pandemic will influence the bond yield spread.

RESULT Hypothesis 1 Analysis
The author then employs panel data regression analysis, which includes cross-section and time series data, with SPSS as the statistical tool.The main model in this study is based on the assumption of a constant slope with a variable intercept for each individual.Durbin Watson is used to test autocorrelation in residuals from a regression analysis.Based on the table 3, it can be interpreted that there are three independent variables (X1_yield1before, X2_ESG and X8_TradeOpenness) that significance or does affect to the dependent variable (bond yield spread).
Based on the findings, the author can conclude that hypothesis 1 is accepted because there is a relationship between ESG score and bond yield spread.Table 4 shows the author's use of correlation to investigate the relationship between ESG score and bond yield spread.It has a -0.112 negative relationship.As a result, a higher ESG score corresponds to a lower sovereign bond spread and influences sovereign risk reduction.The rotated component matrix includes estimates of the correlation between each variable and its estimated components.In factor analysis, rotation is a standard step.It specifies a criterion for removing the indeterminacy inherent in factor analysis results.The rotation changes the factor loadings and, as a result, the interpretation of the factors, but the different factor analysis solutions are mathematically equivalent in that they explain the same portion of the sample variance.The varimax method is used to obtain factor rotation, which attempts to minimize the number of variables with high loadings (so-called salient loadings) on the same factor.This is a factorial axes transformation that allows us to approximate a "simple structure" of the factors, in which each indicator is "loaded" exclusively on one of the retained factors.This improves the interpretability of these variables.Based on table 7, regarding the three dimensions having a heterogeneous impact on sovereign bond yield spread with the social indices is significance or does affect to the bond yield spread.

Hypothesis 3
The empirical evidence [25] indicates that there is a statistically significant relationship between the aggregated ESG score and bond spread.Based on table 8, the 10-year sovereign bond spread (Sig.0.033) is a better predictor of the dependent variable than the 1year ESG score (Sig.0.195).In terms of influencing bond yield spreads, social index outperforms governance and environmental index.

H3
The relationship between ESG score and sovereign bond yield spread is higher for the long term.
ESG implementation has a greater impact on bond spreads over a longer time period.
ESG practices can help reduce sovereign risk by improving a country's reputation, increasing investor confidence, and promoting long-term economic growth.They can also reduce political and regulatory risks, as well as natural disaster and climate change risks.
Countries can attract more investors, improve financial performance, and reduce risks by incorporating ESG into their policies, thereby contributing to economic growth and development.To reap long-term benefits, each country must recognize the potential benefits of sustainability and actively support its implementation.
The following steps may be included in a country's for implementing ESG to reduce sovereign risk: 1. Assess current ESG practices: The first step is to understand a country's current ESG practices.Internal audits, benchmarking against peer countries, and engagement with stakeholders such as investors, civil society organizations, and experts can all help.2. Establish ESG targets and goals: Based on the assessment, the country should establish ESG targets and goals in order to improve its ESG performance.Specific targets for reducing greenhouse gas emissions, improving social outcomes, or strengthening governance practices can be included.3. Create an implementation plan: The country should create a comprehensive plan for implementing its ESG goals and targets.
This should include specific timetables, resource allocation, and actions to be taken.4. Engage stakeholders: Effective ESG implementation necessitates collaboration with a wide range of stakeholders, including investors, civil society organizations, and the general public.The country should solicit feedback and input from these groups to ensure that its ESG strategy meets their needs and expectations.5. Monitor and report on progress: It is critical to ensure accountability and transparency by regularly monitoring and reporting on the country's progress toward its ESG goals.This data can also be used to make necessary changes and improvements to the ESG plan.
By taking these steps, a country can demonstrate its commitment to ESG practices and improve its ESG performance, lowering sovereign risk and making it more appealing as an investment destination.

ISSN: 2581-8341 Volume 06 Issue 02 February 2023 DOI: 10.47191/ijcsrr/V6-i2-48, Impact Factor: 5.995 IJCSRR @ 2023 www.ijcsrr.org 1289 * Corresponding Author: Angela Davita Budiarto Volume 06 Issue 02 February 2023 Available at: ijcsrr.org Page No. 1286-1299 Pillar Measuring Items Indicator VIGEO HBC AM Natixis AM MSCI ESG Neuberger Berman Bloomberg
Type of debt security issued by the government of a country.Bondholders lend money to the government in exchange for the government promising to repay the principal plus interest over a specified time period.These bonds are commonly used as a standard for other types of debt securities.Spreads are yield on sovereign bonds of the considered country minus yield on US sovereign [40]s.[40][63]ControlVariablesTo attain objective, this research is included into correlational research.Correlational research is defined as research that finds the relation between certain variables to others.To obtain the data, purposive sampling is used as the type of sampling.Purposive ISSN:

Table 2 .
Source of data [53]is a linear transformation method for identifying patterns and representing data in a way that emphasizes the most important features.It is used to visualize high-dimensional data in lower dimensions and decrease the number of features, making it easier to analyze and interpret.[53]ISSN:

Table 4 .
Correlation of Hypothesis 1 Following data generation from WDI and WGI, the author used principal component analysis with KMO and Bartlett's Test to produce the result shown below.ISSN:

Table 7 .
1.The six variables Governance in component 1 have moderate to strong correlations.2. The six variables Environment in component 2 have moderate to strong correlations.3. The six variables Social in component 3 have moderate to strong correlations.Result of Hypothesis 2 * Corresponding Author: