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On the one hand, the IMF reiterated its cautious stance with regard to the surge in global debt levels. Indeed, in 2016 this amounted to USD 164,000 billion, equivalent to 225% of global GDP.
The euro crisis showed the extent to which high debt renders a state’s financing vulnerable to shocks on financial markets and substantially undermined the status of risk-free investments. Many states lost their coveted AAA rating granted by extra-financial rating agencies.
On the other hand, the COP 21 calls upon investors to assume responsibility for the financing that is required for the energy transition. In this respect, government bonds represent a major source of financing and provide considerable leverage as well.
From added value to investment decision-making
The sovereign bonds of more sustainable countries have proven to be more resilient during crisis periods. When looking at the 2008 euro crisis, Scandinavian countries or other countries that are generally well positioned in the rankings have held up much better than, for example, Southern European countries.
Many links have been proven between ESG factors and a country’s long-term economic growth and development. Already in the sixteenth century, a link had been established between the environment/geography/climate and a country’s agricultural system, in other words access to food for the people, possible diseases and economic growth.
Academic research has also demonstrated a correlation between the quality of a country’s governance institutions and its debt default risk. Overall governance acts as the cornerstone for the implementation of policies that foster other sustainability dimensions (social and environmental). As a matter of fact, governance relates to the quality, stability and predictability of the policies that have been implemented. This will enable institutions to be resilient in the light of the endogenous and exogenous events that affect states. This stands in contrast to unsustainable factors such as corruption, lack of freedom, red tape, etc. which are detrimental to foreign investments in particular.