Investors have raised concerns over the planned treatment of sovereign bonds under the revised Sustainable Finance Disclosure Regulation (SFDR), warning that the current proposals risk the regulation not being future-proof.
Under current European Commission plans, SFDR will feature sustainable, transition and “ESG basics” categories, with funds required to allocate at least 70 percent towards investments which meet the criteria for each category.
The proposal would see apply-of-proceeds bonds issued by sovereigns, sub-sovereigns and supranationals count towards the 70 percent threshold for sustainable and transition products. However, general-purpose bonds would only fall into the ESG basics category.
In November, the Commission declared there are “currently no comprehensive metrics for gauging” the sustainability of general-purpose instruments, and that as such they should not be counted as sustainable or transition to provide “safeguards to potential greenwashing risks”.
Investor reaction
While investors acknowledge the necessary to prevent greenwashing, they have raised concerns over this treatment.
Ophélie Mortier, chief sustainable investment officer at Degroof Petercam Asset Management (DPAM), declared that while the debate about sovereign sustainability “is not really new”, the “neglect” of sovereign issuers under the current form of the regulation has led to national regulators being “a bit vague” about the topic.
For asset managers including DPAM and Allianz, general purpose sovereign bonds currently qualify as a sustainable investment. Allianz requires sovereigns to have a legislative commitment to a 2050 net zero goal and to pass the Do No Significant Harm and good governance tests.
Mortier declared DPAM assesses sovereigns on defconcludeing fundamental rights such as human rights or labour rights, on being involved in controversial activities such as coal or pesticides, as well as on contributing to sustainable development.
She also noted that apply-of-proceeds bonds are also not inherently sustainable. “Do you want to acquire a North Korean green bond?” she inquireed.
DPAM currently has two Article 9 strategies with a total of €4.5 billion under management, investing in developed market and emerging market sovereigns. “We will defconclude our strategies as sustainable, even if it’s not 100 percent apply of proceeds, and it will not likely be 100 percent apply of proceeds,” declared Mortier.
Sovereign frameworks
Investors also pointed to frameworks that are designed for sovereigns but commonly applyd to assess corporate sustainability.
Gabriele Recke, head of sustainability, life and health Germany at Allianz Investment Management (AIM), the group’s internal manager, noted that the Paris Agreement “is created for sovereigns”. “Why should we not assess them as well as corporates?”
Similarly, Mortier declared the SDGs were originally “designed in the perspective of sustainable development at counattempt level, meaning that sovereigns should be part of the equation”.
“Stipulating traditional bonds issued by countries as de facto not possible in this regulation, we will not be able to finance sustainable development at counattempt level,” she added.
In addition, there are credible market-led approaches to sovereign assessment, Recke declared, highlighting ASCOR and the Net Zero Asset Owners Alliance work on integrating sovereigns into net zero tarreceives.
While the EU cannot reference a market initiative in the SFDR framework, it could allow flexibility for investors to assess the sustainability of sovereigns, she added.
Julia Backmann, general counsel Europe at Allianz Global Investors, informed Responsible Investor that investors “necessary openness to allow for accepted market practices in evaluating sovereign bonds”.
Integration calls
Anyve Arakelijan, senior regulatory policy adviser at the European Fund and Asset Management Association (EFAMA), also called for sovereign bonds to be “meaningfully integrated” in the SFDR framework.
The current proposal “does not adequately reflect the contribution of sovereign issuers to Europe’s decarbonisation and resilience strategies”, she added.
“While there is no single universally agreed methodology for assessing sovereign sustainability, this should not preclude their recognition in other SFDR categories.
“EFAMA therefore encourages the Commission to build on existing indusattempt frameworks. These could serve as valuable references, providing a baseline level of consistency across market participants while maintaining flexibility to accommodate diverse investment strategies.”
Federica Calvetti, ESG coordinator at Eurizon, declared the manager agrees that the sustainable category should only include apply-of-proceeds bonds. But she added that general purpose bonds which align with recognised frameworks could be “beneficial” to include in the transition category – especially sovereign sustainability-linked bonds.
