Cash Management Implications of ESG Debt Instruments

In designing the internal processes for issuing sustainable debt instruments, governments can benefit from considering the potential implications for cash management. Tracking the proceeds from “Environmental, Social and Governance” (ESG) bonds in ringfenced sub-accounts is likely to add to the fragmentation of government bank accounts. This may weaken efforts to strengthen cash management processes in low income and developing countries (LIDCs), where the focus has been on the establishment of a Treasury Single Accounts with comprehensive coverage and fungible cash.

Sustainable debt instruments comprise the range of products that consider ESG factors in their design and the use of funds raised. Since its inception in 2000s, the sustainable debt market has continued to grow in volume, with new types of securities being created. The market saw a record high rate of growth in 2021, with governments and affiliated institutions, dominating issuance globally.[1] Emerging market sovereign issuers are also increasingly including ESG debt in their financing mix and, with new players like Benin and Togo, the set of issuers is enlarging.[2] Instruments issued under the umbrella of ESG or sustainable debt include: green, social, sustainable, sustainability-linked bonds and others. 

While ESG instruments provide alternative and likely less costly financing options, and investor base diversification for governments, it is crucial that PFM processes are well-designed to avoid some potential complications. Investors of ESG debt expect that the issuers of these bonds will follow well-recognized standards such as the Green Bond Principles developed by the International Capital Markets Association (ICMA). These guidelines, although voluntary, are now accepted as good practice. The standards require issuers of a certain group of ESG instruments such as green or social bonds to use the proceeds to finance or refinance eligible projects or assets within specified categories. For example, the ICMA Green Bond principles require that “the net proceeds of the Green Bond, or an amount equal to these net proceeds, should be credited to a sub-account, moved to a sub-portfolio, or otherwise tracked by the issuer in an appropriate manner, …for eligible Green Projects” (Component 3 Management of Proceeds).[3]

What are the implications of the application of the “Management of Proceeds” principle for government cash management? In general, governments should not create separate (ringfenced) bank accounts to fulfill this principle. This can undermine the efforts for cash consolidation and effective cash management, especially in developing countries. The accounting system should be the basis for reporting and tracking ESG specific transactions that flow through the Treasury Single Account (TSA). This enables the Treasury to delink the management of cash from underlying transactions to be tracked and helps manage cash effectively.

Sound cash management practices require an effective consolidation of the government’s cash resources.  An efficient TSA system is a prerequisite for modern cash management and effective centralized control over the government’s cash balances. A sound TSA system is founded on three key principles: (i) comprehensive coverage, (ii) no government bank account outside of the Treasury’s oversight, and (iii) the fungibility of cash resources.[4]

Cash consolidation is still a challenge for many LIDCs with implications for fiscal and debt issuance policies.[5]  A multiplicity of bank accounts that are not closely linked to the TSA - such as accounts for extrabudgetary funds, sinking funds, development funds, externally financed projects, and donor-financed projects - reduces the TSA’s coverage and the fungibility of cash. This may lead to unnecessary borrowing and increased interest costs for governments.

In some cases, the Treasury and/or Debt Management Departments may resort to additional borrowing to meet short-term timing mismatches between cash inflows and outflows, while the idle funds are sitting in the accounts kept outside the TSA. When it is necessary to distinguish individual cash transactions (e.g., the regular expenditure transactions of a government unit) for reporting, transparency and accountability purposes, the solution should not be to hold and/or deposit cash proceeds in individual transaction-specific bank accounts, which may potentially lead to the accumulation of idle cash for extended periods.

It is important that the general PFM framework that surrounds ESG bond issuance is well-developed and well-communicated to market participants, to generate sufficient trust in investors that the government is capable of effectively tracking expenditure.[7]  



 The authors would like to thank Bryn Battersby and Tjeerd Tim, both from FAD, for their comments.

[1] ESG Monitor Q4 2021.pdf (


[3] Sustainable Finance | ICMA » ICMA (





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