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Regulatory and Market Trends for ESG Bonds and Funds, and Some of the Associated Risks of Sovereigns

Promoting the financing of the transition to a sustainable economy is one of today’s key issues. However, access to scarce resources is further complicated by a striking new phenomenon: both regulators and investors are becoming increasingly “choosy”, as they make their decisions on whom to give money to dependent on circumstances that go beyond green and scientific aspects. It is therefore no coincidence that an increasing number of investment funds are obtaining ESG1 ratings that formulate exclusion rules for sovereign bonds based on NGO indicators (e.g. civil liberties, level of corruption). If such criteria become an international standard, a sovereign that fails to meet them could be threatened with total exclusion from the green/ ESG market. The aim of this essay is to review the regulatory environment and the market situation through this lens. It is important to note, however, that both legislation and market preferences are in a quickly evolving, amorphous state, and thus continuous monitoring of the conditions is essential.