How Governments can Advance Sustainability

Influencing Private Sector Investment Decisions

Governments can make it clear, and practical, that investors must consider ESG factors when those factors affect risk and return. The goal is not to force values-based investing. It is to make sure decision-makers look at all the information that can support long-term resilience.

First, put it in the law. Many rules on fiduciary duty (legal obligation to act in a beneficiary’s best interests) use broad words like “prudence” and “loyalty.” These can be read in different ways. A short amendment can remove doubt: when a factor is financially relevant, even if it is labeled “ESG,” fiduciaries (pension trustees, investment managers, corporate directors, and financial advisers) must consider it. This includes things like climate risk, water stress, worker safety, supply-chain reliability, data security, board oversight, and audit quality. The same clause should also say that fiduciaries must not give up expected returns to chase non-financial goals unless beneficiaries have clearly asked for that and the costs are explained.

Second, require a clear process. Good decisions come from good process. Regulators can ask every fund to keep an Investment Policy Statement (IPS) that explains four things: how the fund decides which ESG issues are material; how those issues feed into valuation and risk models; how the fund will vote shares and engage with companies on material issues; and whether there are any exclusions and why. For larger funds, ask for periodic scenario analysis on big topics like climate transition, nature loss, or major human-capital risks. When funds hire outside managers, the request for proposals should ask managers to show, not just claim, how ESG factors change position sizing, cash-flow forecasts, discount rates, or downside cases.

Third, “show your work.” Deal memos and portfolio reviews should record which ESG issues were considered, what data was used, and how the analysis changed the decision. A safe-harbour rule can help: if a fiduciary identifies material issues, uses reasonable data, and documents the impact on the decision, it has met its duty—even if the investment later underperforms.

Fourth, improve disclosure so markets can police themselves. Align investor reporting with global best practices such as those outlined by International Financial Reporting Standards. Ask for simple, consistent information: governance, strategy, risk management, and metrics or targets for material ESG risks. At the product level, require a plain statement of the investment objective, whether ESG is integrated, any screens used, and the expected tracking error or cost of limits. For large entities, phase in limited assurance on key metrics to raise quality over time.

Fifth, make stewardship part of prudence. Require funds to set clear engagement priorities linked to their portfolios. For example, transition plans for heavy emitters or safety standards for sectors with frequent accidents. Allow funds to join collaborative initiatives when it is efficient to do so, and ask for short reports on objectives, actions, and results.

Sixth, respect beneficiary preferences. People have different values. Public plans and retail products can offer options that reflect them. The rule should be simple: if preferences are neutral to expected returns, or immaterial, they can be honoured. If preferences may reduce expected returns or increase risk, that must be explained in advance, and participation should be opt-in. This keeps choice without cross-subsidies or hidden costs.

Seventh, build the right skills and supervision. Boards and investment committees should have basic competence on ESG risk. Require short, regular training so members can read a scenario analysis, question assumptions, and understand audit and governance red flags. Supervisors should integrate material ESG risks into their regular reviews of banks, insurers, and pensions. Expect to see these risks in risk appetite statements, capital planning, and asset-liability management.

Eighth, clean up labels and stop greenwashing. Investors are confused by product names. Define three simple buckets: (1) ESG integration (uses ESG where relevant to improve risk-adjusted returns), (2) sustainability-themed (targets a theme like clean water or workforce safety), and (3) impact (seeks real-world outcomes, usually with extra measurement). Ban labels that do not match the holdings and process. Give the regulator power to force relabeling and to fine repeat offenders.

Ninth, lead by example in the public sector. Sovereign funds, public pensions, development banks, and procurement processes should follow the same rules and publish simple templates others can copy. When government money uses a sound ESG process, it sets a floor for the market and reduces debate.

Tenth, enforce fairly but firmly. Publish exam guides so industry knows what “good” looks like. Run thematic reviews (for example, climate risk in loan books or workforce risk in private equity) and share findings. Penalize only clear failures: mislabeling, missing required disclosures, or not following the mandated process. Pair this with the earlier safe harbour so honest effort is protected.

All of this can be done with proportionality. Small funds should not be forced to build complex models. The rule of thumb is: match effort to exposure and time horizon. If a fund holds long-dated infrastructure exposed to storm damage, it needs deeper climate analysis. If it holds short-term government bills, a lighter touch is enough. The focus is always financial relevance, not ideology.

What ESG looks like in Practice

The Bank of Mauritius issued a Guideline on Climate-related and Environmental Financial Risk Management (2022). It expects banks to embed climate and environmental risks in governance, risk management, and disclosure. This shifts ESG from marketing to supervised risk practice across the financial system. Mauritius also published a Sustainable Finance Framework to steer bond proceeds to green and social categories.

Public Sector Investment Decision Making

1. Link budget financing to measurable natural-capital goals. This turns environmental stewardship into a core part of creditworthiness and sector policy (fisheries, tourism).

In 2018 Seychelles issued a blue bond to fund sustainable fisheries and the ocean economy. The government used guarantees and concessional support to lower costs and attract private investors. The policy idea is simple: tie financing to marine management plans and community livelihoods so the ocean—Seychelles’ core asset—stays productive. This created a repeatable model many coastal states study today.

2. Put clear use-of-proceeds and reporting standards into law or regulation. Investors get line-of-sight to impacts and governments align borrowing with climate plans.

Fiji issued one of the first sovereign green bonds in the developing world (2017). The Ministry of Economy set a Green Bond Framework, listing eligible projects (e.g., renewable energy, resilient infrastructure) and reporting rules. This made climate projects investable at scale and provided a template other small island developing states (SIDS) could adapt.

3. Use sustainability-linked terms and conservation trusts so savings are earmarked for resilience.

Barbados has used innovative debt conversions to free fiscal space for climate-resilient water and wastewater projects. In 2024 it completed a first-of-its-kind debt-for-climate resilience swap, generating about US$125 million in savings for adaptation, backed by multilateral guarantees. An earlier 2022 debt-for-nature deal channels tens of millions into marine conservation. These transactions embed ESG outcomes into public finance and sovereign liability management.

4. Align fiscal policy with ecosystem services.

The Bahamas is refinancing a portion of its external debt to mobilize around US$120 million for marine conservation and climate mitigation over 15 years, including an endowment for long-term financing. The deal aims to protect mangroves and seagrass that store carbon and support fisheries, core economic and natural assets.

5. Combine supervisory guidance with climate-aware public investment rules so banks, pensions, and ministries use the same risk language.

Jamaica’s authorities have started publishing work on climate-related financial risks and how these transmit through the financial system, along with a roadmap for embedding them in supervision. On the public side, an IMF Climate-Public Investment Management Assessment (C-PIMA) set out how to make public investment more climate-responsive. Together, these steps aim to put ESG risk into both prudential supervision and capital budgeting, which then shapes private investment signals.

ESG is turning from a buzzword into rules, deals, and disclosures that shape real investment. Blue and green bonds, debt-for-climate and debt-for-nature swaps, prudential guidelines, and climate-aware public investment planning are all practical tools. They help governments protect natural assets, build resilient infrastructure, and signal to investors that long-term risks and opportunities are part of the decision set. That is exactly what good fiduciaries—and good industrial policy—should do.

Omar Chedda is a Sustainable Development Specialist based in Jamaica