布魯蓋爾研究所-主權(quán)可持續(xù)性相關(guān)債券在實(shí)現(xiàn)凈零排放方面的潛力（英）-2023.3

PolicyBrief

Issuen?07/23|March2023

Thepotentialofsovereignsustainability-linkedbondsinthedrivefornet-zero

AlexLehmannandCatarinaMartins

Executivesummary

AlexLehmann(alexander.lehmann@)isaNon-residentFellowatBruegel

CatarinaMartins(catarina.martins@)isaResearchAnalystatBruegel

TheauthorsthankDanielHardy,JerominZettelmeyerandparticipantsinaBruegelworkshopforvaluablecomments.

EuropeanUniongovernmentshaveforsomeyearsissuedgreenbondsthatraisefundsforclimate-relatedspending.Thesebondshavebeenreceivedwellincapitalmarketsbutbecausetheypromiseacertainuseofproceeds,theycomplicatebudgetmanagementandmaynotmatchinvestors’claimsofhavinganimpactonnationalclimatepolicies.

Publiccommitmentsmadebymajorinvestorsandassetownerssuggestthatlimitingclimatetransitionrisksandtheassessmentofthealignmentofsovereignswithnet-zerotargetswillnowbecomekeydeterminantsofportfolioallocation.Yielddifferentialsinbondmarketsarealreadybeginningtoreflecttransitionrisksthatarisefromtheinadequatepursuitbyissuersofclimatetargets.

Unlikestandardgreenbonds,sustainability-linkedbonds(SLBs)createalinkbetweenperformance(outcome)indicatorsandthefinancialtermsofthebonds.SLBshavegrownrapidlyinimportanceinprivatemarketsandarenowbeingassessedbysovereignissuers.

WeshowthatsovereignSLBscouldhelpincentiviseclimatepoliciesinEUcountries,andaccelerateemissionreductions.Theywouldbeaneffectivetoolforsignallingcommitment.AcommonEUframeworkforissuancebyEUcountrieswouldenhancecapitalmarketintegrationandthetransparencyofnationalpolicies,andwouldlimitclimatetransitionrisksinEUcapitalmarketsmorebroadly.

Recommendedcitation

Lehmann,A.andC.Martins(2023)‘Thepotentialofsovereignsustainability-linkedbondsinthedrivefornet-zero’,PolicyBrief07/2023,Bruegel

Somefeaturesofsovereigngreenbondsmaymakethisinstrumentproblematicinthemanagementoffiscalrevenues

2

1Introduction

Theimplicationsoftheclimatetransitionandtheriskthatcompanieswillnotreducetheiremissionsquicklyenoughhaveoccupiedinvestorsforsometime.Climate-relatedrisksarenowalsobeginningtoinfluencesovereigndebtmarkets(OECD,2022).Thisisevidentinthegreaterinterestinvestorspaytoissuerdisclosure,intheformofenvironmental,socialandgovernance(ESG)metrics,andalsointhegreaterpoliticalaccountabilityforclimateoutcomesrequiredforpublic-sectorissuers.

Twoprincipaltypesofinstrumentshaveemergedinbondmarketstoreflectissuerpoliciesandinvestormandates.Afirstset,includinggreenbonds,restrictstheuseofproceedstocertainexpendituresandrewardsissuersfordocumentingthisgreenspending.Asecondandmorerecenttypeofbondlinksrewardsforissuerstocertainoutcomes.Thesebondsgivetheissuermuchgreaterfreedominspending,butimposefinancialpenaltiesifcommitmentsarenotmet.Thesebondsmightalsorewardachievementofclimatetargets.

Thegreeningofsovereigndebtisimportantbecausealargepartoftheexpected€350billioninadditionalannualcapitalexpenditurestoachievenet-zeroemissionsintheEUwillneedtobemobilisedbythepublicsector,possiblyamountingto1.8percentofannualGDP(Bac-cianti,2022;Klaa?enandSteffen,2023).Inadditiontomeetingclimate-relatedfundingneeds,sovereigndebtmanagersmustalsocontaintherisksthatwillariseiftheirgovernmentsmanagethetransitiontoalow-carboneconomypoorly–whichcouldresultinhigherborrowingcostsorliquidityconstraintsindebtmarkets(Bingler,2022).Sovereign-debtissuancewillneedtoadapttothesenewinvestordemandsthatresultfromtheclimatetransition.Adebt-issuancestrategythatreflectsinvestors’concernsaboutclimateoutcomeswouldbecomplicatedbythefactthatclimatetargetsarelargelysetattheEUlevel,thoughimplementedpartiallyatthenationallevel.AmbitionandcredibilityinmeetingEUandnationalclimatecommitmentsstillvarywidelybetweenstates.

Inanefforttocapturethisshiftininvestormotivations,13EuropeanUnioncountriesandtheUnitedKingdomhaveissuedgreenbondssince2016.Yet,thevolumeofissuancetodateissmallrelativetowhatwillberequiredofpublicbudgets.Volumesaresettorise:undertheNextGenerationEU(NGEU)programme,theEUcouldmobiliseupto€185billioningreenbondfundingforspendinginmemberstates.ThiswillcomeontopofgreenspendingunderotherEUfundsandprogrammes,whichwillincreasinglyabsorbcountries’capacitiestogenerateandaccountforpublic-sectorgreenprojects.Butthisnotwithstanding,EUdebtissuerslackasingleinstrumentthatdeliversadditionalclimate-relatedfinanceatscale,containsclimatetransitionrisksanddeliversclimatepolicyoutcomestoinvestors.

Theinherentfeaturesofsovereigngreenbonds,inparticularrelatingtorestrictionsontheuseofproceedsraisedincapitalmarkets,maymakethisinstrumentproblematicintheman-agementoffiscalrevenues.Problemsmaybecomemorepronouncedifnational,EUandothersupranationalgreenbondissuanceisexpanded(Hardy,2022;Domínguez-JiménezandLeh-mann,2021).Agreatervolumeofgreenbondsoutstandingwouldcomplicatesovereign-debtmanagementandthefunctioningofgovernmentbondmarkets,whichshouldbethebedrockoftheEU’scapitalmarketsunion(CMU).Inthefaceofthis,sovereignissuersarenowexaminingasanalternativesustainability-linkedbonds(SLBs),whichrewardissuersforoutcomesratherthantheuseofproceeds,andwhichhavebeenexpandingrapidlyincorporatebondmarkets.

Inthispaper,weshowthattheongoingshiftsininvestors’motivationsandtheirgreaterfocusonclimateoutcomescanmakesovereignSLBsviablewithintheEU.WefindthatsovereignSLBswouldhavemanyofthecharacteristicsdesiredbydebtmanagersandwouldconstituteamuch-needed‘climatehedge’forinvestorsinthecorporatebondmarket.However,nationaldebtmanagementofficeswouldneedtopreparevarioustechnicalaspects,cruciallybydocumentingandreportingclimateoutcomesreliably,byfosteringcoordinationonthebondformatandbydesigningaprimaryissuanceprocessthatreflectsboththefinancialandclimate-relatedtermsoftheirbonds.

PolicyBrief|Issuen?07/23|March2023

WestartbyassessingtheextenttowhichsovereigngreenbondsissuedbyEUcountrieshaveestablishedameaningfulnewfundingtoolinlinewiththetraditionalobjectivesofsov-ereigndebtmanagementandcapitalmarketefficiency,andifthisformatcouldindeedmobi-lisetheneededadditionalfunds.Wethenexamineshiftinginvestormotivations.Inregulationandinprivatelawinterpretationsoftheirfiduciaryduties,investorsarenowaccountableforclimaterisksintheirportfolios,andsovereigndebtisnoexceptiontothis.WethenexaminewhethersovereignSLBscanprovidethisaccountability.Finally,weofferaframeworkforEUgovernmentSLBs,whichwouldofferinvestorsclarityonimpact,andmorecrediblydisciplinenationalpolicybasedonexistingcommitmentsunderEUlaws.

2ThelimitationsofsovereigngreenbondsintheEU

Sincetheywerefirstissuedin2016,greenbondshavebecomeanincreasinglypopulartoolinthebudgetaryfundingstrategiesofEUgovernments.Theamountsoutstandingarestillsmall:€176billionatend-2022,relativetotheoverallsizeofover€10trillionofdebtissuedbyEUcentralgovernments(Figure1).ThirteenEUdebtagencieshaveissuedgreenbonds,manyinrepeatedissues.Several,includingFranceasEurope’slargestnationalissuer,considergreenbondsanintegraltoolintheirfundingstrategies,andnowregularlyderivepartoftheirbudgetfundingthroughthisinstrument.Otherissuers,includingDenmark,AustriaandSwe-den,nowalsoderiveasubstantialpartoftheirbudgetfundingthroughgreenbonds(Figure1,rightpanel).

Useofthegreenbondsbynationalissuerscomesontopofissuancebynationalpromo-tionalbanks(whicharefullyguaranteedbythesovereign)andsubstantialissuancebytheEuropeanInvestmentBank(EIB),oneofthefirstplayersinthismarket.

TheEUitselfiscommittedtousinggreenbondsforasignificantshareoffundingoftheNextGenerationEU(NGEU)programme1.EUcountriesmustallocateatleast37percentofpost-COVID-19economicrecoveryexpenditurestogreenprojects.Spendingthathasbeenapproved(innationalRecoveryandResiliencePlans)hasinfactslightlyexceededthistargetforthegreenshare.HencetheEUcouldpotentiallyissueover€185billioningreenbondsbyend-2026,slightlymorethanthetotalissuedsofarbythe13memberstates.Byend-2022,€36billioninNGEUgreenbondshadbeenraisedandfundshadbeenallocatedtoroughlyonequarteroftheeligibleexpenditures2.EUcountrieswillofcourseseektoabsorbNGEUfundingfully.However,theircapacitytogenerateadditionalgreenprojectsthatcouldunderpinparal-lelnationalgreenbondprogrammeswilllikelybeconstrained.

1See

https://next-generation-eu.europa.eu/index_en.

2EUCommissionGreenBondDashboard:

https://commission.europa.eu/strategy-and-policy/eu-budget/eu-

borrower-investor-relations/nextgenerationeu-green-bonds/dashboard_en

.

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PolicyBrief|Issuen?07/23|March2023

4

PolicyBrief|Issuen?07/23|March2023

€billions

Italy

France

Germany

Spain

Belgium

Netherlands

Austria

Poland

Hungary

Portugal

Greece

Romania

Ireland

Finland

Czechia

Sweden

Denmark

Slovakia

Slovenia

Croatia

Lithuania

Luxembourg

Bulgaria

Latvia

Malta

Estonia

€billions

France

Germany

Italy

Netherlands

Belgium

Spain

Ireland

Austria

Hungary

Slovenia

Poland

Denmark

Lithuania

Greenissuance

%regularissuance(sinceyear?rstgreenissue)

Figure1:RegularandgreenbondissuancebyEUgovernments

2,500

2,000

1,500

1,000

500

0

PanelA:Outstandingamountofnon-greenissuance(€billions)

60

50

40

30

20

10

0

PanelB:Greenissuanceamountsandshareofregularissuancesince?rstgreenissue

60%50%40%30%20%10%0%

Source:Bruegel,basedonBloomberg.Notes:Outstandingandissuedamountsasof5December2022.Theshareofregularissuancereferstotheratioofgreenbondissuancetoregularbondissuancesincetheyear(notdate)ofthefirstissuanceofagreenbondineachcountry.

Investorscouldbeforgivenforbeingconfusedaboutthedifferentframeworksonwhichnational,EIBandEUgreenbondissuesarebased.Thenationalframeworksthatsetcondi-tions,suchasexpenditureseligibleforfinancing(orrefinancing)andtheissuer’sreportingonallocationsorimpact,varywidely.Thisarisesfromdifferentbudgetarylawsand,inmanycases,parliamentaryprerogativesoverbudgetaryallocations,includinggreenspending.Whileissuersadheretothehigh-levelindustryguidelinesissuedbytheInternationalCapitalMarketsAssociation,thereisnoeasymatchwiththeEUclassificationofsustainableactivities(thetaxonomy3),thelastpartsofwhichbecameeffectiveonlyinJanuary2023,orthefutureEUGreenBondStandard4.

Moreover,onlyafewofthegovernmentsthatissuegreenbondshavesetoutaconvincingstoryabouthowgreenbondsfitintotheirbroaderdebtmanagementstrategies.Ourreviewofdebt-managementdocumentationsuggeststhatoutofsevenmajorgreenbondissuers,onlyGermanyandItalyhaveattemptedsuchajustification.Germany,forinstance,referstodiver-sificationandinnovationasanintegralpartofdebtmanagement5.Italyalsoaddsthatgreenbondinvestorshavedesirablecharacteristicsforasovereignissuer,suchasmorelong-terminvestmenthorizons,andtheyarelesspronetodivestholdingsinturbulentmarkets.Manyissuers,explicitlyorimplicitly,seethenewinstrumentasatooltopromotetheirgreencre-dentialstoalargerpoolofinvestors,therebyreapingbenefitsinotherfundinginstrumentsorbyestablishingawiderinvestorbase6.TheEU’snet-zeroemissionsgoalby2050,andtheneedtomobilisepublicspendingtothatend,werereferencedinnationalgreenbondframeworks,thoughinnoneofthegeneraldebtmanagementstrategieswereviewed.

Forinvestors,greenbondsissuedbyEUgovernmentsremainanicheassetclassinfinancialmarkets,ill-suitedasatoolinliquiditymanagement.Investorswillbeconcernedthatnationalissuerswillbeunabletorolloutafurthersupplyofgreenbondsbackedbylocalprojects,orthatstandardsofimpactwillslip.Governmentswillalsoseekthroughtheirgreenbondsfundingforclimate-relatedspendingthatcannotbeeasilyalignedwiththeEU

3See

https://finance.ec.europa.eu/sustainable-finance/tools-and-standards/eu-taxonomy-sustainable-activities_en

.

4See

https://www.europarl.europa.eu/legislative-train/theme-an-economy-that-works-for-people/file-eu-green-

bond-standard

.

5Throughitsgreenbonds,Germanyexpectstointroduce“newfinancialinstrumentstoleverageadditionalpotentialforinterestcostsavings,improvediversification,createevenmoreefficientwaysofborrowing,andtapnewinvestorgroups.”Greenbondsarepresentedasan“exampleofinnovationandhavenowbecomeafixedpartofstrategicissuanceplanning.”SeeDeutscheFinanzagenturwebsite:

https://www.deutsche-finanzagentur.de/en/federal-

funding/debt-management/portfolio-management

.

6SeealsoDoronzoetal(2021)forabroaderreviewofthesovereignissuer’scost-benefitassessment.

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PolicyBrief|Issuen?07/23|March2023

taxonomy,orforprojectswithlifetimesthatdonotmatchinvestors’investmenthorizons7.ThecontinuedgreenbondissuancebyEUcountriesmayhencefallfoulofincreasinginvestorscrutinyandmaynotbeinlinewithtraditionaldebtmanagementobjectives,whichempha-sisepredictabilityofsupplyandliquidityofasingleassetclass.

2.1Incentiveproblems

Moreover,greenbondscreateatleastthreeproblemsinrelationtotheincentivesofissuersandinvestors.

First,bondinvestorslackadirectmeansofenforcinggreencommitmentsmadebygov-ernments.TheInternationalCapitalMarketAssociation’s2014GreenBondPrinciples8,whichintheabsenceofEU-levelregulationstillformthebasisofmostgreenbondframeworks,restonfourkeyissuercommitments:specificationoftheuseofproceeds;aprocessforprojectselectionandevaluation;aframeworkformanagingthebondproceeds(whichoftenremaininringfencedaccounts);andongoingreportingofspendingfromthebond(thoughnotnecessarilyofimpact).Thecompliancewiththeseprinciplesofanissuer’sframework(notofanindividualbond)isnormallyconfirmedthroughaso-calledsecond-partyopinionbyanoutsideprivateverificationprovider.

Bondinvestorshaveknownforsometimethattheyhavenocontractualrightstoenforcegreenspendingbytheissuer,orrecoursetotheissuershouldsuchspendingfailtomaterial-ise9.Failuretouseproceedsinthewayinitiallysetoutbytheissuerinitsgreenbondframe-workwouldnotnormallyconstituteaneventofdefault,norwoulditgivethebondholdertheoptiontoacceleraterepaymentordemandotherremedies(DoranandTanner,2019).Boltonetal(2022),inadetailedreviewof150publicsectorgreenbonds,predictablyfoundthatthesebondspromiselittleornothingthatwouldbelegallyenforceable.Theissuer’sfailuretoadheretoinitialcommitmentsmayresultinawithdrawalofthesecond-partyopinion,thoughthiswouldcausenomorethanreputationaldamage.Theabsenceofenforceableremediescouldbeaconcernforinvestorswhenprojectsthatarestrictlygreenmaynotbeavailableinsufficientquality,sizeorpredictability,orcanonlybefinancedretroactively.Thebondholder,whoseassetmaynolongerconformwithitsESG-basedinvestmentmandateandwhomayneedtosellataloss,hasnowayofseekingredress.

Second,evenifproceedsareusedexactlyasdescribed,itisunclearwhether,intheabsenceofgreenbondissuance,budgetaryspendingwouldhavebeenanydifferent.GreenbondslackwhatESGinvestorsseekintermsof‘a(chǎn)dditionality’.Crucially,thecompositionandvolumeofprojectspendingisunlikelytobedifferentifbudgetaryallocationsareanactofparliament.Issuerswillnotallowagreen-bondcontract,letalonecommitmentswithintheratherinformalgreen-bondframeworks,tocomeintoconflictwithregularbudgetaryprocessesgovernedbyhigherlaw.Germany,forinstance,explicitlydevotesallgreen-bondproceedstopastexpenditures,undermininganyinvestornotionofadditionalityorimpact.Becausebudgetaryreceiptsarefungiblewithinthegovernment’scashaccountitisimpos-sibletoattributecertainspendingitemstoindividualbondissues(Hardy,2022).Whereasacorporategreenbondmayhavetangibleeffectsonfundingvolumesandprojectcapitalexpenditures,thisattributionisverydifficulttoestablishforasovereign.Itisastretchforinvestorsinsovereigngreenbondstoclaimtohavecontributedtocertainclimateoutcomes.

7UndertheEU’sSustainableFinanceDisclosureRegulation(2019/2088),investorsandadvisorsneedtodisclosethetaxonomyalignmentoffinancialproducts.Thisisinherentlymoredifficultforsovereignthanforcorporategreenbonds.

8See

/sustainable-finance/the-principles-guidelines-and-handbooks/green-bond-

principles-gbp

.

9Poorenforcementisthereforeaproblemforallinvestorsthatholdgreenbondswithinaportfoliothatneedstocomplywithcertainnon-financial(ESG)characteristics.Itwouldbeamoresevereproblemforso-calledimpactinvestors,whoseekbehaviouralchangeonthesideoftheissuerandneedtoaccountforthischange.However,impactinvestorsareasyetanichesegmentoftheinvestorlandscape,andsovereignbondsarenotnormallypartoftheirholdings.

Athirdandfinalflawofsovereigngreenbondsisthatfewissuershavebenefittedfromameaningfulissuancepremiuminprimaryauctions(theso-called‘greenium’).Sovereignissuersmayexpectareductionintheirfinancingcosts,thoughanygreeniumwouldneedtooutweightheadditionaltransactioncostsinherentinthegreen-bondformat.Yetthisexpec-tationseemsmisplaced,giventhatinliquidbondmarkets,investorswillarbitrageawayanypremiumforinstrumentsthatcarrythesamecreditquality,andwillofferinvestorsthesamerecoursetoissuerassets.Anymarginindeedseemsinsignificantrelativetoissuancecosts(GrzegorczykandWolff,2022).Boltonetal(2022)similarlyfoundonlyaminisculegreeniumforEUissuers(intheorderofafewbasispoints).

Thislackofameaningfulgreeniumgiverisetotwointerpretations:eitherinvestorsdonotcareaboutgreenspending(thoughseesection3),ortheycareonlywithsufficientenforce-mentandadditionalitythatleadgreenbondholdingtofosteradditionalspending.Boltonetal(2022)foundanissuancepremiumindevelopingcountriesexposedtofrequentphysicalclimaterisks.Thiscouldpointtoinvestors’altruisticmotivations.Greenbondissuancenor-mallyonlyfundsspendingonclimatechangemitigation,whichdoeslittletobuildresilienceagainstclimatedisasters.Anyeffectfromgovernmentspendingonclimateriskexposurewould,inanycase,beobservedforplainvanillabondsaswell.

3Whatinvestorswant

Whetherandtowhatextentinvestorscareaboutasovereignissuer’sclimatepoliciesmat-tersgreatlyforthefutureissuancestrategy,andthedesignofnewbondinstrumentsbyEUcountries.

TheemergenceofgreenbondsandotherESGinstrumentsincapitalmarketshasbeendrivenbythechangingmandatesofinstitutionalinvestors,whichnowreflectsustainabilityrisksandopportunitiestoamuchgreaterextent.Sovereignbondportfoliosarenowalsoincreasinglycoveredbysustainabilityobjectivesininvestormandates,eventhoughtheeffectsofclimateoncreditqualityaremoreindirectthanforcorporatebonds.Theadverseeffectsofphysicalclimaterisksonthebondspreadsofhighlyexposedcountrieshavebeenestab-lishedforsometime(Volzetal,2021).Climatetransitionriskswillalsomatterforsovereignsthatareslowtoimplementtheirstatedclimatepolicies.Suchriskscouldmaterialisewhencarbon-basedinfrastructureisrevaluedasa‘strandedasset’,ifeconomiesdonotbenefitfromemergingtechnologiesorbecausetheybecomeless-attractiveeconomicpartnersforrapidly-transitioningcountries.Thesovereignissuer’sexposuretotransitionriskswillbemoreindirectthanisthecaseforacorporateissuerina‘brown’industry.Theeffectsoncreditqualitymaystillbematerialthroughfiscalrevenues,growth,arevaluationofpublicassetsandpossiblepublicguaranteestothefinancialsector.

Empiricalevidenceindeedsuggeststhatinvestorsaresensitivetoclimatetransitionrisksinbothadvancedandemergingmarkets.Bingler(2022)foundthatsincethe2015ParisAgreement,yieldsoflong-termgovernmentbondsofadvancedcountriesthatperformedonclimatetransitionwerelowerthanthoseofclimatelaggards,socountriesthatperformbetteronclimatebenefitintermsoffundingcosts.Collenderetal(2022)evenshowedthatsubstitutionawayfromnaturalresourcesintorenewableenergylowerssovereigndebtbor-rowingcosts,thoughthistransitionismorecostlyindevelopingcountrieswithmorelimitedprospectsfordiversificationandattractingclimatefinance.Chengetal(2022b)underlinedthepotentiallysignificantreallocations,shouldinvestorsseeknet-zeroemissionsintheirsovereignbondportfolios.Basedontheirsimulation,severalEUsovereignissuerscould

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PolicyBrief|Issuen?07/23|March2023

beexposedtoasubstantialandabruptrebalancingofinvestorportfoliosasclimatechangeunfolds.Eventhoughsovereignbondinvestorsnormallyallocateportfolios‘passively’basedonamarket-weightedindex,therearenowbondindicesthattiltsuchallocationsbasedonclimaterisksandopportunities10.

Investorsincreasinglyattempttocontainclimatetransitionrisksthroughportfoliosthatareconsistentwitha‘net-zero’world(iewithcarbonneutralitythatlimitstheglobaltempera-

Investorsincreasinglytrytocontainclimatetransitionrisksthroughportfoliosthatareconsistentwitha‘net-zero’world

7

tureriseto1.5°Cabovepre-industriallevels).Atleastthreedevelopmentsexplaintheevidentinvestorsensitivitytosovereignclimatepolicies.

Afirstandfundamentalfactorliesinthereinterpretationofthefiduciarydutyofassetmanagers.Thisisanage-oldlegalconceptthatappliestoanypersonororganisationthatholdspowerintheinterestofanotherinarelationshipbasedontrustandconfidence,andwhereinformationisnoteasilyshared.Fiduciarydutyiscentralforassetmanagers,whoaregenerallyexpectedtoactinthebestinterestofbeneficiariesandtoinvestasan‘ordinaryprudentperson’would.Theinterpretationofthisconcepthasshiftedconsiderablyinallkeyjurisdictionsandisnowwidelyseenasencompassingtheinclusionofsustainabilityfactorsininvestmentanalysisanddecision-making,activeengagementininvesteefirms,andarequire-menttounderstandsustainabilitypreferences,whetherornottheyarefinanciallymaterial.TheintegrationofESGfactorsisalreadyreflectedinmanyinvestmentmandatesdefinedbyassetowners.Thisofcoursediffersdependingonthenatureofthefund,whichmaysimplytrackabasketofsovereigndebtexposurespassively,orberequiredtoholdthelocalsover-eign’sassets.Inanycase,failingtoreflectESGconcernsentirelyisnowwidelyregardedasafailureoffiduciaryduty(PRI,2020;Barkeretal,2022).

Thisreinterpretationoffiduciarydutyinprivatelawhasalsobeenreflectedinstrength-enedregulationintheEUandelsewhere.UnderEUcapitalmarketlegislation,inparticulartherevisionoftheMarketsinFinancialInstrumentsDirective(MiFIDII,2014/65/EU)in2019,assetmanagers,includinginsurancecompaniesandpensionfunds,arenowrequiredtointe-grateESGfactorsintoinvestmentdecisions,adviseclientsontheclimateperformanceofanyassetandassesstheirpreferencesonsustainability(ESMA,2022).Inaddition,theSustainableFinanceDisclosureRegulation(SFDR,EU2019/2088),applyingfrom2023,requiresallkeyparticipantsinfinancialmarketstoexplainthesustainabilityambitionineveryproductandallfinancialadvice.TheimplementationofEUlegislationisstillinfluxanddoesnotextendtofleshingouttheexactnatureofasovereignbondwithsustainabilitycharacteristics.Neverthe-less,transparencyandintegrityrequirementsforassetmanagersaremuchimproved.

Lastly,assetmanagersandtheult