More sustainable governments can save billions on international financial markets

The sustainability policies of OECD countries have a small but significant impact on the interest that they are paying on international financial markets. The higher their sustainability level, the lower their ‘spread’: that is, the premium that countries pay in addition to so-called ‘risk-free interest’. If the sustainability score of a country increases by 1%, the spread of 10-year government bonds decreases by 0.15%. These are the conclusions of an international team of academics that includes Bert Scholtens, Professor of Sustainable Banking and Finance at the University of Groningen.

‘This 0.15% seems very small, but through the extensive national debts that must repeatedly be financed, it mounts up substantially’, says Scholtens. ‘The governments of OECD countries must pay or repay hundreds of billions towards their debts every year. In the United States alone, this adds up to more than 1,000 billion dollars. So a lower spread can save billions.’

Sustainability implies a well-considered long-term vision

The researchers explain their conclusions by suggesting that a more sustainable society may relate to a careful, long-term government strategy. ‘Providers of capital find such strategies important because they have been lending their money to governments for many years, sometimes as long as 30 years’, says Marc-Arthur Diaye of Sorbonne University in Paris. ‘Good sustainability performances thus imply a long-term strategy, one that revives trust of financiers.’

Favourable effect on financial burdens

Spreads can particularly increase in times of political and economic unrest. This makes the financing of government expenditure more expensive. Scholtens and his colleagues, Diaye, Gunther Capelle-Blancard, Patricia Crifo and Rim Oueghlissi, researched whether the premiums that OECD member states pay on international markets relate to their sustainability policies. They concluded that in terms of sustainability, social (e.g. education, health and gender equality) and administrative factors (e.g. corruption, stability and law enforcement) lead to a favourable effect on governmental financial burdens. The researchers noted that this effect has become considerably stronger since the financial crisis of 2007-2009.

Important conclusions for government policy

‘We hope that our outcomes will contribute to macro-policy discussions’, says Scholtens. ‘Decisions regarding sustainability are partly made in the political sphere, in which many motives play a role in policy-making. One such motive is the government’s financial burden. This argument often raises its head when it comes to new or alternative policy. However, it has barely played a role in terms of sustainability thus far.’

Scholtens: ‘Some people believe that making society sustainable is an expensive task. Road-user surcharges and a CO2 levy surely mean that consumers must pay something in some way or another. This makes sustainability unpopular. These measures are often presented by academics and people who work in the field. They want the people who cause the problems to contribute to the costs.’

Insightful methods and independent sources

The international team of researchers used publicly accessible information from independent sources, in particular the World Bank. ‘We did not want to be dependent on commercial information providers that place judgements on the sustainability of countries, because we do not exactly know how they came to those judgements and thus cannot reconstruct this. We used freely accessible data and developed an insightful method that everyone can use,’ says Crifo, who is affiliated with the CIRANO research institute at the University of Montreal.

Sustainable Development Goals

In accordance with the United Nations Sustainable Development Goals, the researchers considered very diverse aspects of sustainability, such as education, life expectancy, healthcare, gender equality, corruption, democracy, stability, forestation, renewable energy, water management and air pollution. Through a so-called principal component analysis, they calculated a benchmark for sustainability in OECD countries. These countries were chosen as they had the most information available. In addition, the researchers used various economic and financial variables based on the most recent academic financial-economic literature.

More information

• Contact: Bert Scholtens, tel.: 050 - 363 7064, email: l.j.r.scholtens rug.nl
• Full article: Gunther Capelle-Blancard, Patricia-Crifo, Marc-Arthur Diaye, Rim Oueghlissi, Bert Scholtens, Sovereign bond yield spreads and sustainability: An empirical analysis of OECD countries, Journal of Banking and Finance, 2019, volume 68, pp. 156-169. DOI: 10.1016/j.bankfin.2018/11.011

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