By making a formal commitment to advance the SDGs, countries can send an important signal. Such a commitment can create stability around opportunities, reduce risks, and motivate investment. Yet governments can also reverse or water down commitments, as shown by the recent example of the UK. The implementation of commitments is often fraught with practical difficulties, and greenwashing is a constant risk.
Metrics are key to directing investment towards the most impactful opportunities. Ensuring that financial investments actually achieve their sustainability objectives is especially critical for assessing the contribution of sovereign bonds to transition efforts. It builds trust and facilitates reporting and impact evaluations.
Measuring how countries are following through on their commitments – and if we can expect them to deliver – would help reduce risk and direct investments to where they can deliver the highest expected sustainability impact and financial returns. This applies not only to sustainability-linked sovereign bonds and thematic bonds, but to the market as a whole. The challenge is more pronounced in emerging markets, where there is significant potential to deploy funds but data is harder to come by. Credible data could reduce mistrust and improve conditions for institutional investors.
Currently, we measure how sovereign bond issuers perform on sustainability through data on past performance, often with significant time lags and insufficient frequency. It often takes time – in some cases a few years – for policy reforms and investments to develop their full impact. Forward-looking commitment to the sustainability transition and operational implementation are assessed mainly through engagement with country policy makers.
Existing datasets, such as the Climate Change Performance Index by GermanWatch, mainly cover advanced countries. No comprehensive dataset measures these dimensions for emerging markets, although some projects are under way to measure sub-sectors of the sustainability agenda. These include the ASCOR project, which focuses on climate change impact and the net zero transition for sovereign bond issuers.
We want to measure the likelihood that something will happen, and be measurable, several years into the future – a data tool that is scalable, comprehensive, and able to inform decision making and quantitative assessments of risk and opportunities associate with individual instruments or issues.
During our session at Building Bridges, the foremost Swiss sustainable finance event, on 5 October 2023, we explored the case for creating a data-driven assessment of this complex issue that could be used for modelling and risk assessment in investment decisions. Participants identified 11 characteristics that such a tool would need:
1. The metrics should be as granular as possible. They should cover different levels of government – including, for example, city governments and other sub-national entities which may be responsible for the implementation of commitments. Legal consistency across different entities is also key.
2. The focus should be not only on environmental metrics, but also metrics of social inclusion and the strength of civil society to perform a watchdog role.
3. Relatedly, the degree of political volatility and risk of a backlash is key to assessing the likelihood that long-term political commitments will be followed through. Such a metric could include polarization and the longer-term support of the public and key stakeholders such as unions.
4. A mechanism to prioritize which commitments are most important for a country, without harming the remaining goals, would help to avoid making commitments without first understanding what progress is feasible.
5. The tool should capture commitment signals, including transparency gaps on the development and publication of public sector strategies and roadmaps.
6. Trust in data used for KPIs and computation of targets is essential, and the strength of country-level disclosure frameworks is key to assessing the reliability and trustworthiness of data. A verification mechanism that can avoid greenwashing would be important for quality assurance.
7. Alignment between ESG and the SDGs would be helpful to ensuring private sector alignment with national SDG targets.
8. Metrics need to create both a baseline and baseline pace of reform to better measure the performance of emerging markets and ensure that commitments are achievable without imposing the burden of reporting on these countries. We need to create an environment in which we can give the resources needed and ensure transparency to reduce inequality in measurement.
9. Measurement of the relationships and trade-offs between the metrics would be helpful, to the extent possible.
10. Any new metric should be more timely than existing sovereign statistics, which are subject to significant time lags.
11. Metrics need to be simple to understand and follow and avoid too much technical complexity.
Establishing a set of credible, easy to capture, independent metrics could unleash investment flows into emerging markets. However, it is important to avoid unintended consequences – for example, when building their portfolio some investors may be tempted to exclude countries at the bottom, which are in most need of investment.
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