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DMOs turn to ESG, the Dutch turn to market finance


This week in Keeping Tabs: the role of debt management offices in green policy, and an update on EU countries' use of capital markets.

We all know that governments' DMOs are key players in green finance through their issuance activities: sustainability-themed sovereign bonds have led the wider market, and it given an official seal of approval. But do the DMOs themselves have a broader role beyond issuance?

A paper written for the World Bank explores the position of these offices, which are critical for their countries yet escape much public attention.

The report covers many topics, but Keeping Tabs was particularly interested in this question about the broader mandate of the DMO when it comes to climate policy.

The authors write that historically, debt management policy was closely linked to the fiscal and monetary agenda, but in the past three decades, policymakers have shifted to think about debt management on a standalone basis: a "microfocused mandate".

"Risks related to use of the funds borrowed, the quality of the public expenditure, or indeed possible financial outcomes dependent on future climate scenarios are generally seen as being outside the scope of the DMO and pertaining to the fiscal policy mandate," they say.

Does the increased importance of environmental, social and governance (ESG) factors in finance change this?

The authors point out that these factors change the costs and risks associated with government debt, meaning perhaps the DMO should "take these factors into account when formulating the debt management strategy and making funding decisions". This could also lead to the office pitching into the national stance on ESG matters.

Sovereign debt can be thought of as a transfer from one (future) generation to another (present) one. The authors imply that adapting to, mitigating and coping with climate change involve issues of intergenerational resource-sharing as well, meaning this could be incorporated into decision-making. However, they present the other side of the case too, stating that it could be argued that ESG considerations are no different from others that are related to how borrowed money is used, and should not receive special treatment.

As for how as a DMO could implement sustainability policy beyond the themed issuance in itself, the paper says that it could integrate ESG criteria when choosing the banks it works with: the World Bank's International Finance Corp has already developed a method for choosing lead underwriters for syndications using an ESG lens.

"Even a small weighting in the selection criteria can send a strong signal for market participants and investors," the authors say.

It could also reward ESG-friendly buyers. The Netherlands has already allowed investors to register as accredited green bond investors to receive preferential allocations.

Away from pumping out debt, DMOs also take on other functions, the authors note.

In France and Austria, the DMOs are involved in the auction of carbon credits. In Sweden, it is charged with overseeing certain activities of the nuclear power industry, including making sure that it can finance management and disposal of nuclear waste.

Elsewhere, DMOs can also manage risk transfer solutions for catastrophes, where they buy protection against risks like hurricanes and earthquakes, whether through an insurance facility or a catastrophe bond.

Meanwhile, the Association for Financial Markets in Europe (Afme) has released its latest tracker on capital markets activity.

It finds that the boom in capital markets financing in the first half of the year shifted the funding structure of non-financial corporates in the EU slightly towards market finance.

However, in Italy, both public equity and public bond issuance from the corporate sector have fallen to "historic lows": the proportion of market finance for Italian corporates dropped to 4% in the first half of the year, versus 7% in 2019.

At the other end of the spectrum is the Netherlands, which led European countries when it came to the proportion of non-financial corporate funding that was market-based in the first half of the year, at 39%.

Meanwhile, in the UK, the proportion of market-based funding has fallen from 33% in 2015 to 27% this year, as bank lending expands.

As for sustainable finance, France and the Netherlands accounted for 55% of EU27 issuance in the first half of the year.

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