No one will argue on the importance of sovereign bonds for healthy portfolio construction, both in terms of size and weight. However, when it comes to sustainability, the European regulator largely leaves them aside, despite the key role sovereign debt can play in the financing of sustainable and inclusive growth. We explain why.
Ruling out sovereign bonds from a sustainable approach is not an option. The lack of precise and detailed regulation should not be an excuse to stick to the current definition. It is rather a reason to plead for a disciplined, rigorous, and credible approach to include sovereign bonds as important contributors to sustainable development in the same way as instruments issued by the private sector. Today we are witnessing an important debate at the European level on the classification of sovereign bonds in the European Commission’s ESG scale:
First, there is a need to define to what extent sovereign bonds integrate ESG factors, promote environmental and social characteristics or even pursue an environmental and social objective. Moreover, sovereign bonds are not covered by the European Taxonomy and can therefore –from a technical point of view— impossibly meet the environmental objectives set out in the taxonomy.
Secondly, the so-called “principal adverse impact indicators” specific to the asset class are limited in number and open to interpretation, such as the social indicator on the number of countries in social violation.
Finally, let’s have a look at the last and third option for investors subject to MIFID to express their sustainability preferences: How should one clearly distinguish and measure the environmental and/or social objectives of a country (let alone define appropriate KPIs)?
Yet, it is obvious for a multitude of reasons that sovereign bonds should be recognised in their own right as a vehicle to finance a sustainable and inclusive economy.
