In an increasingly interconnected world, the influence of Environmental, Social, and Governance (ESG) factors on public debt sustainability has become a focal point of economic policy and research. The critical ESG components—political risk, demographic shifts from an ageing population, and climate change—create unique and compounded challenges to fiscal stability. Political instability can raise borrowing costs and slow economic growth because unpredictable governments negatively affect market stability (Bekaert et al., 2014). Demographic trends, particularly the growing number of older people in developed countries, put much pressure on public finances. This leads to higher healthcare and pension costs (European Commission, 2023). Meanwhile, the impacts of climate change, such as extreme weather events and rising sea levels, pose a risk of undermining economic output and budget constraints, calling for large-scale adaptation investments (Bolton et al., 2022).
The three policy briefs discussed in this article offer a clear overview of how Italy, representative of many advanced economies, addresses these challenges. The first brief, “Mitigating the Fiscal Risks of Political Instability: Policy Insights for Sovereign Debt Sustainability”, illustrates how political reforms can improve debt sustainability by stabilizing governance structures and, in turn, reducing the fiscal risks associated with political volatility. The second brief, “Securing Italy’s Economic Stability in the Era of Population Ageing”, focuses on Italy's demographic challenges. It emphasizes the fiscal pressures that arise from an ageing population and outlines strategies to mitigate these effects through policy reforms to increase productivity and manage healthcare costs. Finally, the third brief, “Sovereigns on Thinning Ice. Navigating Debt Sustainability Under Climate Change”, discusses integrating climate risk into debt sustainability analyses. It emphasizes the need for proactive measures to address the fiscal impacts of climate change through adaptation and international cooperation.
These briefs emphasize the need for a complete and proactive method to handle political, demographic, and environmental risks. Italy's experience is a useful example for other countries facing similar ESG challenges. It shows the benefits of including detailed risk assessments in public debt management to achieve long-term financial and economic stability.