Can sovereign bonds be sustainable?
1. The issues we have today
- Cost and Risk Management: Managing projects at the lowest possible cost leaves stakeholders vulnerable due to unlimited risks and assumptions about others' ability to pay, raising concerns about corruption and cost-effectiveness.
- Policy and Sovereign Responsibilities: Engaging emerging markets and defining sovereign responsibilities within taxonomies is complex, requiring a longer transition period of 10 years instead of 5 years.
- Market Challenges and Political Cynicism: Political cynicism and preference for distressed assets like coal persist, with investors reluctant to adopt new sustainable-linked bonds (SLBs) and heightened market risks post-invasion.
2. Solutions
- Pricing and Financial Strategies: Determine appropriate pricing for initiatives, including externalities, and engage a sovereign rating agency without relying solely on credit rating agencies.
- Policy and Market Engagement: Encourage countries to explore sovereign bonds, embed policies in bond structures, and use step-up and step-down features for financial flexibility. Reconciliation of DMO general duty to get best value for taxpayers with step ups and step downs features. This allows money to move in and out - A real value would be 125bps but most do 20bps with step ups.
- Regulatory and Supportive Measures: Provide technical support through IFIs, create an enabling environment for SLBs with proper regulation and infrastructure, and address cultural differences in regulatory approaches.
3. Key Takeaways
- Impact and Opportunities: SLBs can positively disrupt capital flows, integrate nature and environmental considerations into sovereign bond strategies, and attract new participants and bondholders as shown by Uruguay’s example.
- Data and Pricing Priorities: Prioritize data quality and verifiable KPIs, focus on pricing for SLBs, and understand the impact of actions on externalities to prevent EMs from being left behind.
- Regulation and Market Dynamics: SLBs require supportive regulation and infrastructure, tailored regulatory strategies for different cultural contexts, and incentives to improve market access conditions and funding costs.