As the G20 gathers in South Africa, the global economic community faces a critical juncture. How should it respond to mounting sovereign debt burdens in highly indebted countries without compromising long-term sustainability, resilience and inclusive development? This challenge is especially acute in emerging and developing economies, where debt vulnerabilities intersect with climate shocks, social inequalities and weak institutional capacities.

We call for a paradigm shift in debt management and restructuring – one that places environmental, social and governance (ESG) principles at the core of sovereign debt frameworks. The aim is not only to enhance financial stability and market access but also to promote sustainable investment and accelerate progress toward the Sustainable Development Goals.

Rethinking sovereign debt frameworks in a new era

Historically, debt management has focused narrowly on fiscal consolidation and liquidity restoration. While these are essential for macroeconomic stability, they often neglect broader sustainability goals. This traditional approach has failed to address the systemic vulnerabilities that underpin repeated debt crises in low- and middle-income countries.

Today’s debt landscape demands a new approach – one that acknowledges that climate resilience, social inclusion and good governance are not peripheral issues but core determinants of long-term creditworthiness and economic health. Integrating ESG principles into debt management is not just a normative aspiration – it is also a pragmatic response to the complex risks shaping sovereign finance.

Why ESG matters for debt sustainability

Incorporating ESG principles into debt management brings multiple benefits.

•  Environmental risks such as climate-related disasters can exacerbate fiscal stress, damage infrastructure and weaken growth prospects. Embedding climate resilience into debt instruments and fiscal planning is crucial for mitigating these shocks.
•  Social factors, including inequality, health and education, affect a country’s human capital and productivity. Ignoring these dimensions can undermine economic recovery and social cohesion, especially in post-crisis contexts.
•  Governance influences how effectively debt is managed and how transparently fiscal decisions are made. Weak institutions, corruption and lack of accountability often erode market confidence and increase borrowing costs.

A shift towards ESG-aligned debt strategies would improve the alignment between a country’s development goals and its financing strategies. This is especially relevant in a world where investors are increasingly seeking impact-oriented investments and where sustainability-linked financial products are gaining traction.

A policy roadmap for ESG-aligned debt strategies

To operationalise this shift, we propose a comprehensive ESG-aligned debt management and restructuring framework, built on three key pillars:

1. Adoption of ESG-linked sovereign instruments
   Countries should expand the use of sustainability-linked instruments, such as green and blue bonds, debt-for-nature and debt-for-climate swaps, and climate resilience debt clauses. These instruments can directly link debt repayments to measurable ESG outcomes, providing incentives for sustainable policy actions.
2. Integration of ESG risk assessments into credit ratings
   Sovereign credit assessments must go beyond conventional macroeconomic indicators to reflect ESG risks. Enhanced transparency and standardisation of ESG metrics are needed to ensure consistent evaluation across countries. This would help debtors and creditors better understand long-term sustainability risks and price debt accordingly.
3. Embedding ESG in debt restructuring and fiscal frameworks
   Debt restructuring processes – especially those involving the Paris Club, G20 Common Framework and private creditors – should include ESG considerations. Fiscal policy frameworks should incorporate sustainability-linked fiscal rules and targets to align budget planning with development and climate objectives.

Learning from practice: Global case studies

Emerging and frontier markets offer valuable lessons in ESG-aligned debt strategies. Countries such as Barbados, Belize and Seychelles have successfully negotiated debt-for-nature swaps that freed up fiscal space for conservation and climate adaptation. Meanwhile, Chile and Fiji have issued green bonds to finance renewable energy and climate resilience.

These experiences illustrate that innovative debt instruments are not just feasible – they can be catalytic in mobilising private capital, enhancing sovereign reputation and achieving co-benefits across the SDGs. However, technical assistance, capacity building and multilateral support remain essential for scaling these solutions in less-resourced contexts.

The role of the G20: Catalysing a global ESG debt architecture

The G20 is uniquely positioned to champion the integration of ESG principles into sovereign debt frameworks. It can do so by:

• encouraging multilateral development banks and international financial institutions to incorporate ESG in lending criteria and technical assistance;
• facilitating dialogue between debtor countries, creditors and rating agencies to align expectations on ESG risks and data disclosure; and
• supporting the development of international standards for ESG-linked debt instruments and ESG risk assessments in sovereign finance.

By promoting coordinated action and global norms, the G20 can ensure that ESG-aligned debt strategies become a central pillar of global financial architecture, not an afterthought.

Toward a more resilient and inclusive global economy

Integrating ESG principles into debt management is more than a technical fix: it is a transformative shift towards resilience, sustainability and equity. As highly indebted countries navigate a complex recovery landscape, ESG-aligned debt strategies offer a pathway to rebuild trust, attract impact investment and ensure that development is sustainable, both financially and ecologically.

The G20 must seize this moment to lead with vision and responsibility. By embedding ESG into the DNA of sovereign debt, we can help forge a new social contract for finance – one that aligns economic recovery with planetary health and human well-being.