FROM ANALYSIS TO ACTION: ASSESSING SOVEREIGN CLIMATE-RELATED OPPORTUNITIES AND RISKS

FROM ANALYSIS TO ACTION: ASSESSING SOVEREIGN CLIMATE-RELATED OPPORTUNITIES AND RISKS - By Dr Rory Sullivan

Sovereign bonds are a huge part of most institutional investors’ portfolios. The sheer scale of the investment in sovereign bonds means that these investors also have great influence. It’s why Bill Clinton’s political advisor James Carville famously said, “I used to think that if there was reincarnation, I wanted to come back as the President or the Pope… but now I would like to come back as the bond market. You can intimidate everybody.”

 It is, clearly, critical that any investor looking to drive the low carbon transition needs to understand the progress that countries are, or are not, making to manage their climate risks and opportunities. ASCOR is the first investor-led initiative that allows investors to gain that insight. It provides comprehensive and comparable data on how sovereigns are managing their transition, physical and social risks.

Last month, ASCOR published its latest landscape report: State of Transition in Sovereigns 2024: Tracking national climate action for investors. The report reviews the climate change performance of 70 high-, middle- and low-income countries, accounting for more than 85% of global greenhouse gas (GHG) emissions and 90% of global GDP.

The report’s results are sobering. No country has a 2030 NDC target ambitious enough to align with their 1.5°C benchmark. Only 16% of countries have a transparent and credible commitment to phase out fossil fuel subsidies.  Given the focus of COP29 on climate finance, it is also striking that only one third of developing countries have been transparent about the costs of essential climate mitigation and adaptation, data that are essential to quantify and prioritise the scale of public and private finance needed to effectively respond to climate change.

More encouragingly, 80% of the assessed countries have a net zero target, with some targeting net zero before 2050, and over half have now established a legal framework for national climate policy.

Chronos’ View: How Can Investors Use the ASCOR report?

ASCOR now covers the countries that are the most relevant for bondholders as together these 70 countries cover 75–100% of the major sovereign bond market indices. This means that investors can now assess a much broader segment of their investment portfolios and can implement strategies such as climate-aware index investing and climate tilting. 

Investors can also use ASCOR data to:

·       Explicitly assess climate-related risks and opportunities in sovereign debt analysis.

·       To create Paris-aligned sovereign indices.

·       To have structured dialogue with governments on the progress they have made in developing and implementing climate policies.

·       Supplement corporate climate risk assessments with insights on country risk.

From an impact perspective, ASCOR helps governments to prioritise where they intend to invest (in terms of mitigation and in terms of adaption) and where they need support with these investments. This, in turn, could enable low- and medium-income countries to better align their goals of economic growth with the goals of a resilient and just low-carbon transition. 

Yes, the ASCOR report shows there is a long way to go to align with a Paris pathway. But its deep analysis on countries from China to Chile provides investors with a much clearer picture of where progress needs to be made, and enables the power and influence of bondholders to be harnessed to accelerate progress towards the low carbon economy.

Notes

1.           For more information on ASCOR, please visit https://www.ascorproject.org/. 

2.            ASCOR’s academic partner is the Transition Pathway Initiative Centre, based at the Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science.

3.           The ASCOR project is supported by Chronos Sustainability. 

4.           ASCOR’s Steering Committee comprises the Asia Investor Group on Climate Change (AIGCC), the UN-convened Net-Zero Asset Owner Alliance (AOA), Ceres, the Investor Group on Climate Change (IGCC), the Institutional Investors Group on Climate Change (IIGCC) and Principles for Responsible Investment (PRI).

5.           The ASCOR Advisory Committee includes Aktia Bank, Allspring Global Investments, Amundi Asset Management, the Church of England Pensions Board, Colchester Global Investors, Franklin Templeton, MFS Investment Management and Ninety One.