Policy brief

Accounting for climate policies in Europe’s sovereign debt market

Sovereign debt will be vital in stimulating sustainable investment, but information is lacking on how green public spending actually is.

Publishing date
03 May 2021

The authors are grateful for very helpful comments from Moritz Krämer, Patrice Cochelin and Paul Munday in the context of a related project, undertaken with Stavros Zenios.

International debt investors increasingly demand assets that are aligned with environmental, social and governance objectives. Sovereign debt is being belatedly swept up in this change. This huge asset class represents a uniquely long-term claim and funds a wide range of public expenditure, both brown and green. Public capital expenditures will be a central part of the roughly €3 trillion investment budget needed to pay for the European Green Deal.

European Union countries have so far met investor appetite for climate-aligned assets through sovereign green bonds, the issuance of which has rapidly grown since 2017. The EU itself will also issue green bonds in large volumes. However, because of some inherent flaws in such instruments and as their still-weak frameworks, these bonds are unlikely to meet the environmental criteria demanded by investors, and will complicate established principles in sovereign debt management.

Much more comprehensive information is needed on the climate related aspects of the public budgets of EU countries. Greater transparency in this respect would support stability and improve the functioning of capital markets, given that sovereign debt plays a pivotal role in all investor portfolios and also in regulatory and monetary policy.

Adoption by sovereign issuers of green budgeting principles, based on a common taxonomy of sustainable activities, would enhance transparency. It could also be driven by investors who, under new EU rules, must disclose the climate-related aspects of all financial instruments offered in the capital market.

Recommended citation:
Domínguez-Jiménez, M. and A. Lehmann (2021) 'Accounting for climate policies in Europe’s sovereign debt market', Policy Contribution 10/2021, Bruegel

About the authors

  • Alexander Lehmann

    Alexander Lehmann joined Bruegel in 2016 and is now a non-resident fellow. His work at Bruegel focuses on EU banking and capital markets, private debt issues and sustainable finance. He also heads educational programmes in development and sustainable finance at the Frankfurt School of Finance.

    Until 2016, Alex was the Lead Economist at the European Bank for Reconstruction and Development (EBRD) where he led the strategy and economics unit for central Europe and Baltic countries. At EBRD, and in numerous subsequent advisory roles, he has worked with central banks, EU institutions and international development institutions on capital market development, financial stability and crisis recovery. Previously, Alex was an official at the International Monetary Fund, a consultant for the World Trade Organisation and the central Bank of Mexico, and held academic positions at the Royal Institute of International Affairs (Chatham House) and the London School of Economics. He has published widely on trade and competition policies, and on financial regulation and banking policies in the euro area and emerging markets. He holds a graduate degree in economics from the London School of Economics and a Ph.D. from Oxford University.

  • Marta Domínguez-Jiménez

    Marta Domínguez Jiménez was a Research Analyst at Bruegel. Her research focuses primarily on monetary policy, financial systems and international trade and capital flows. She has published on these issues for Bruegel, in academic journals and European Parliament and Commission reports, among others.

    She holds a bachelor from the University of Oxford, where she specialised in international macroeconomics and monetary economics, and a Master's from the College of Europe in Bruges. Before joining Bruegel, she was an Analyst within the Markets division of Citigroup in London, where she worked on the structuring of bespoke fixed income products and developing systematic quantitative investment strategies.

    Marta is fluent in Spanish and English, and proficient in German and French

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