In September 2020, the Government of Egypt successfully issued a five-year $750 million sovereign green bond, the first of its kind in the Middle East and North Africa. By confirming its commitment to environmental and sustainable development goals, Egypt increased investor appeal (the bond was five times oversubscribed) and broadened its investor base (Europe 47%, the U.S.41%, East Asia 6%, and the Middle East 6%). The bond also benefitted from lower cost (50 basis points lower than initial price guidance). Meanwhile in another continent, the Uruguayan debt management office is doubling down on efforts to include information about environmental policies, carbon footprint, climate action milestones, sources of electricity generation, gender equality indicators, and social security coverage in reports, seminars and meetings with investors.
Environmental and social risks are becoming increasingly important in investment decisions
Normally investors buying government bonds assess the macroeconomic outlook of the sovereign issuer, geopolitical issues, internal politics, demographics, and social dynamics to understand credit risk. Increasingly investors are explicitly focusing on ESG criteria in investment analysis and decisions. They are using ESG criteria to better gauge the risks and opportunities of investment and either filtering out sovereigns that may pose a financial risk due to unsustainable practices or pricing in the risks and opportunities. At the same time, impact investing mandates are on the rise.
As a result, debt managers financing critical public expenditure, particularly now that funding needs have increased significantly due to the pandemic, are faced with new risks and opportunities. Systematic and proactive engagement with investors on ESG can make a difference.
“Investors need ESG data to make investment decisions, and if the debt manager is unable to engage with investors meaningfully, they will obtain information from other sources, missing the opportunity to convey the country’s own perspective on sustainability challenges, opportunities and goals,” said Rodrigo Cabral, Senior Debt Specialist, Macroeconomics, Trade and Investment. “Strong messaging around national initiatives and performance may provide an opportunity for governments to attract capital by differentiating themselves from others.”
ESG in sovereign debt analysis is complex
It is imperative that debt managers effectively integrate their country’s ESG initiatives into their investor engagements. However, ESG analysis for sovereign debt is complicated.
“Individual investors approach ESG issues from different perspectives, and what they consider material varies,” said Marcelo Jordan, Senior Portfolio Manager and ESG specialist, World Bank Group Pensions. “Impact investors may give a different weight to the pace of carbon transition than investors taking an ESG integration approach. The overall nature of the investor, its size and investment mandate affect which ESG risks it considers as material.”
Debt managers, who are in the front lines with investors, are not typically well-versed with sustainability issues such as how exposed the country is to climate risk, food security or plans for transitioning to a low-carbon economy— all of which are taking on greater prominence in discussions with investors.
A platform for engagement on ESG
Over the last few years, the World Bank Treasury has hosted a series of roundtable discussions to create a neutral platform for investors and sovereign issuers to engage with each other on ESG issues. Earlier this year Treasury conducted surveys of investors and debt management offices to gather insights and knowledge on investor expectations and sovereign issuer challenges.
“Treasury plays an important role in financing sustainable development through its triple A–rated innovative Green Bond and Sustainable Development Bond issuances, its sustainable finance technical assistance program, and the World Bank Pension Fund’s ESG integration and responsible ownership approaches,” said Miguel Navarro-Martin, Treasury Manager for Financial Products and Client Solutions. “The World Bank’s mandate, its track record as a pioneer in this market, and its role as an impartial broker allows us to convene market participants, bond issuers, environmental specialists and social scientists to tackle issues like ESG.”
The surveys affirmed discussions and exchanges at the roundtables and forums: more than 90 percent of debt managers are receiving ESG-related questions by investors, with an increase in frequency over the last 12 months. Investors are using ESG analysis in security selection, asset allocation, and thematic investing. However, few debt management offices are addressing ESG in their engagement with investors or integrating their national sustainable development goals and funding strategies.
A step-by-step guide for debt managers
The World Bank Treasury developed a practical guide for debt management practitioners titled “Engaging with Investors on Environmental, Social and Governance (ESG) Issues” to bridge the communication gap between the investor and sovereign issuer. The Guide shows which ESG issues investors consider material; why sovereign debt managers should and how they can engage with investors on these issues; how they can communicate targets, plans and performances systematically and why they should include the option to issue thematic bonds—green, blue, social, sustainable— to reach new investors.
“Engaging on ESG with investors requires debt managers to leave their comfort zones and work with line ministries, budget departments, and ESG data and score providers—even when resources are constrained,” said Farah Imrana Hussain, Senior Financial Officer, World Bank Treasury. “In the guide, we provide a toolkit, listing key actions that sovereign debt managers should take to ensure they meet investor expectations in this changing environment.”
The guide complements the recently published World Bank report “Riding the Wave: Navigating the ESG Landscape for Sovereign Debt Managers,” which defines a framework that debt managers can use to design an appropriate strategy for undertaking ESG activities. In combination the guidance provided in the two reports will help sovereign issuers and investors in their engagement around ESG issues.