Investor stewardship is increasingly being deployed as a strategy for driving positive environmental outcomes. The majority of research on stewardship has concentrated on public equities, while other asset classes have been largely overlooked. Consequently, our understanding of the nuances and complexities of sovereign debt stewardship remains limited, despite its importance in the transition to net zero. Drawing conceptually from a burgeoning literature on investor impact creation, we undertake document analysis and conduct 20 semi-structured interviews with key stakeholders to explore the levers available to institutional investors as they seek to generate real-world impact on environmental issues through sovereign debt investment. We argue that investors can generate impact through their capital allocation, most effectively by investing in sovereign sustainability-linked bonds, and by signalling demand for environmental action through overweighting Use-of-Proceeds bonds in their portfolios. We present new evidence that shows investors are routinely engaging with sovereign nations on environmental policy, and we discuss the nuances inherent in deploying engagement to create impact in this asset class. We conclude that there is strong potential for positive impact through engagement, but we highlight risks associated with the practice, most notably the potential to infringe on the sovereignty of the engaged country.
