By Carmen Nuzzo, Head of Fixed Income, PRI

Carmen Nuzzo

Engagement on environmental, social and governance (ESG) issues is an underutilised practice among sovereign bondholders, and this needs to change.

As funders of sovereign debt, bondholders can play an important role in driving change and shaping ESG outcomes through their investment decisions, as we highlight in the PRI’s new report, ESG engagement for sovereign debt investors.

Many investors in this market segment already engage with sovereign issuers and other country authorities as part of their assessment of economic fundamentals, such as long-term growth outlooks and fiscal debt trajectories. However, they have – until recently – eschewed engaging explicitly on ESG issues or to track how countries fare on sustainability pledges.

There are many reasons for this reluctance, including concerns that engagement of this nature could be misconstrued as political lobbying, advocacy or interference with governments’ policy choices.

Pricing, not politics

However, this is not the case. Bondholders engage to make more informed investment decisions, and it is difficult to see how they can do this without having conversations about ESG issues.

Indeed, sovereign bondholders sign up to all the Principles of Responsible Investment, including Principle 2 on active ownership.

The terms active ownership and stewardship have – admittedly – historically been viewed as equity-centric, and equity holders have a host of avenues through which to push for change that are not open to bondholders, such as voting at AGMs.

Nonetheless, sovereign (and corporate) bondholders are not exempt from undertaking ESG engagement activities just because they are unable to use the same channels as their equity counterparts.

A 360-degree process

In fact, sovereign bond ESG engagement is a 360-degree process, where discussions with numerous other country stakeholders – including opposition parties, NGOs, multi-national companies, supranational organisations and credit rating agencies (CRAs) – can help to form a country view and enhance risks assessment.

And as sovereign ESG engagement lends itself to – and benefits from – this multi-pronged approach, it also means that sovereign bondholders that invest passively are not excluded from such activities. While they would not engage directly with issuers, they can certainly approach index and data providers to discuss their methodologies and product offerings, and to voice their views about country selections.

There are also signs that attitudes are shifting, and this should be welcomed. The World Bank has recently published a report to help countries’ Debt Management Offices to respond to the growing investor demand for sustainable finance. Moreover, products are also being developed to incorporate a broader view on ESG risks, such a BlackRock sovereign bond ETF designed to weight countries on their level of risk from climate change.

Contributing to a sustainable recovery

The COVID-19 crisis has increased countries’ public financing needs, and this presents investors, as funding providers, with a unique opportunity to engage with sovereigns on delivering sustainable recovery plans.

Sovereign engagement on ESG issues will not only help drive change and contribute to a more sustainable recovery, it is also vital for moving the needle on existing agreements and commitments, such as the Paris Agreement and the Sustainable Development Goals.

Indeed, those frameworks can represent a useful, non-controversial starting point for engagement discussions, as they are based on global agreements, such as the Universal Declaration on Human Rights and the United Nations Framework Convention on Climate Change, which most countries have already ratified.

A stepping stone to scaling up

Sovereign ESG engagement is not without its challenges – from the political sensitivities, to size constraints and the perception that countries with good credit quality do not need to be approached – but none of these should be viewed as a free pass for what is an integral part, and duty, of all responsible investors.

To that end, the PRI’s new report aims to provide insights on how sovereign engagement is conducted, and how the practice can be scaled up to advance real-world change. We hope this will serve as a stepping stone to further work and discussions with signatories and issuers.

For regular updates on the PRI sovereign debt workstream visit



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