Irene Monasterolo, co-author of a policy report for the German G7 on sustainable debt recovery

Written on 21 Apr 2022.


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A debt crisis is looming in the Global South. High levels of public debt service and insufficient fiscal and monetary space are threating recoveries and impeding much-needed investments in climate resilience and the Agenda 2030.

We are very pleased to share a new Think7 policy brief by Irene Monasterolo, Professor of Finance at EDHEC Business School, EDHEC-Risk Institute on how to address the debt crisis and promote a sustainable recovery in the Global South; a report co-authored with Ulrich Volz (SOAS University of London & German Development Institute - DIE), Kathrin Berensmann (German Development Institute / Deutsches Institut für Entwicklungspolitik - DIE), Sara Burke (Friedrich-Ebert-Stiftung),  Kevin Gallagher (Boston University Global Development Policy Center), Stephany Griffith-Jones (Initiative for Policy Dialogue at Columbia University), Martin Kessler (Finance for Development Lab).

 

This report makes 7 recommendations for the G7 to address the debt crisis in the Global South and provide all countries with the opportunity to invest in sustainable recoveries:

  1. Reinforce efforts to increase transparency of public and private sovereign debt;
  2. Push a reform of the International Monetary Fund (IMF) and World Bank’s Debt Sustainability Analysis (DSA) to fully include climate and sustainability risks and investment needs;
  3. Encourage the IMF to create an option for all sovereign debtors to request an updated DSA as a basis for negotiations with its public and private creditors;
  4. Create legal safeguards for debt restructurings and limiting opportunities for holdouts to derail negotiation processes and outcomes;
  5. Increase incentives for private creditor participation in debt reprofiling and restructuring, respecting the principle of comparable treatment of creditors;
  6. Initiate a dialogue with sovereign debtor groups representing climate-vulnerable nations;
  7.  Assure policy coherence by fostering the alignment of new debt issuance with the climate and sustainability targets.

 

As an immediate step, the German G7 Presidency should therefore invite representatives of climate-vulnerable sovereign debtor groups to the G7 Summit and initiate a dialogue on debt restructuring options for climate-vulnerable nations.

 

Finance needs to properly account for sustainability risks, and it needs to be aligned with internationally agreed sustainability goals.

In this regard, it is important that G7 countries not only work towards a consensus for basic sustainable banking and finance standards, taxonomies and regulations, but also make sure that their domestic sustainability standards apply to overseas financing activities of domestic financial institutions. While establishing common standards through harmonised taxonomies is fundamental, and enhancing stress tests is crucial, a more proactive regulatory approach by policy makers and supervisors is needed, ruling out the financing of harmful activities that undermine the achievement of the Paris climate goals and thereby threaten global prosperity, says Irene Monasterolo, Professor of Climate FInance, EDHEC Business School, EDHEC-Risk Institute

 

Access the policy brief "Addressing the Debt Crisis in the Global South: Debt Relief for Sustainable Recoveries".

 

On April 30, they published a second policy brief entitled: "Scaling up Sustainable Finance to Enable Sustainable Economic Recoveries". 

To scale up sustainable finance and align all financial flows with climate and sustainability goals, this policy brief makes ten recommendations for the G7:

  • 1. Intensify efforts to develop, align and implement science-based sustainable finance taxonomies across the G7;
  • 2. Make disclosures of climate-related risks and opportunities mandatory for all publicly quoted companies, large private companies, and supervised financial institutions and introduce a harmonised standard across the G7;
  • 3. Make the publication of net-zero transition plans mandatory for all publicly quoted companies, large private companies, and supervised financial institutions;
  • 4. Introduce and advance mandatory climate stress testing;
  • 5. Adjust prudential frameworks to account for climate related and other environmental risks;
  • 6. Decarbonise the portfolios and operations of all public financial institutions and central banks;
  • 7. Enhance the role of national development banks (NDBs) and explore options for creating new NDBs to scale up financing for the SDGs;
  • 8. Harness the potential of digital finance to scale up sustainable finance and investment and strengthen citizen-centric finance;
  • 9. Promote the issuance of sustainability-linked and just transition bonds;
  • 10. Scale-up sustainable and climate finance for developing countries.

 

Think 7

Think7 is an engagement group of leading think tanks from the G7 countries. It works to develop and propose research-based policy recommendations to support the German G7 presidency. The Think7 process is jointly coordinated by the Global Solutions Initiative and the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) during the German G7 presidency 2022.

The T7 Task Force on Sustainable Economic Recovery will develop research-based policy advise for Germany’s G7 Presidency on formulating national and global policies that will not only enable and sustain rapid economic recoveries, but also help the achievement of the Agenda 2030 for Sustainable Development and the Paris Climate Goals. The Task Force will develop policy ideas for re-establishing growth momentum for the world economy; the scaling up of green investment; for addressing the debt crisis in the Global South; for reinvigorating global trade and building more resilient supply chains; and on the role of international cooperation and international organisations in supporting these goals.