Climate assessment: New tool set to change sovereign bond investment
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The Assessing Sovereign Climate-related Opportunities and Risks Project has completed its first two stages and is expecting to have an initial set of metrics and indicators ready by the fourth quarter, so sovereign bond investors will be able to assess countries based on areas like emissions pathways alignment, climate mitigation and adaptation and funding needs.
ASCOR started in summer last year, with eight asset managers joining initiators BT Pension Scheme, the Church of England Pensions Board and key investor organisations. The project represents over $5tn of assets.
Twelve months on, the project has completed its first two stages: project participant interviews and establishing investor expectations. Stage 3 of the project is expected to be completed by Q4 2022, when the project will have identified an initial set of metrics and indicators that can be used by investors. It will allow investors to assess governments’ climate-related commitments, their policy frameworks, such as carbon pricing, energy subsidies, the phase-out of combustion vehicles, deforestation and land use policies, and the actions they are taking to ensure that the benefits of the low carbon transition and of adaptation are shared among the general population.
ASCOR said it will not score countries or give investment advice or direction.
Victoria Barron, ASCOR chair and head of sustainable investment at the BT Pension Scheme, said good quality analysis on all asset classes is a must for institutional investors wanting to manage their climate risk and achieve net zero goals.
“While significant progress has been made, one asset class which remains a blind spot is sovereign debt which, for many institutional investors, can form a large part of their portfolios,” she said, noting that the ASCOR project will help to change this.
For Barron, it is important there is no debt denial to countries that need to improve their climate policies, so countries have the means to finance climate policies.
“We are very mindful of the north/south divide – in terms of the need for capital, and in terms of responsibilities for historic and for future emissions - and we want to ensure issues of justice and fairness are fairly reflected within the ASCOR tool,” said Barron.
Adam Matthews, ASCOR vice-chair and chief responsible investment officer of the Church of England Pensions Board, explained that the sovereign bonds assessment tool has to be practical and fair. “We need to ensure that investors understand climate-related risks and opportunities and how well these are being managed by governments. From that analysis, we can then understand what role we can play in supporting the transition in key economies,” he said.
How is your fund assessing government bonds on climate risk?