ASCOR project launches pilot framework for sovereign climate risk assessment

Countries to be assessed across emissions, climate policies, just transition and investment potential, but no aggregate score to be produced

The ASCOR project has launched a pilot framework for assessing the risks and opportunities posed to sovereign issuers by climate change.

The project is a collaboration between a $5 trillion investor coalition and a series of investor groups including the PRI, IIGCC and Net Zero Asset Owners Alliance. It was formed in 2021 to develop an internationally agreed framework for assessing sovereign issuers on climate and improving the quality of data available.

The framework revolves around nine indicators, spread across the categories of emissions pathways, climate policies and opportunities to finance the transition. Sovereigns are assessed against each indicator on a series of yes/no and data metrics.

For instance, on the emission trends indicator countries will be assessed against four yes/no metrics, including whether absolute emissions and emissions intensity have decreased over the past five years, and four quantitative metrics, which include annual percentage change in absolute emissions.

The emissions pathways category covers emission trends, national 2030 targets and longer-term targets, while the climate policies assessment is spread across mitigation, adaptation and the Just Transition.

Victoria Barron, head of sustainable investment at the BT Pension Scheme and co-chair of ASCOR, said that many countries were aware of the challenges posed by the Just Transition, but had not taken much action, with many investors also not touching on the area.

“We thought it was something that was actually lacking in a lot of credit analyses, so we wanted to bring that to the fore and we wanted to include it,” she said. “Investors need to understand how nations are supporting their economies and societies.”

The Just Transition metrics cover the existence of a Just Transition strategy and national commissions, assessments of the regressive effect of carbon pricing or fossil subsidy reform, and contribution to international climate finance.

There is no explicit mention of indigenous groups in the proposed framework. Barron said it was “part of the long list of things we wanted to address, but we just couldn’t in this first iteration”.

ASCOR will be watching how the area develops with a view to integrating it but had begun with “quite high-level Just Transition themes”, she added.

The final category looks at opportunities for investors to provide finance towards climate risks and opportunities. Its three indicators cover finance for mitigation and adaptation, as well as “financing transition opportunities”. Metrics for the latter cover the solar, wind, hydro and geothermal potential of a country, as well as its stores of transition minerals and potential for nature-based solutions.

Absence of aggregation

Results for each indicator in the first two categories will be presented as a yes, no or partial alignment, based on the approach of the Climate Action 100+ benchmark. However, results of the assessment will not be aggregated into one overall score.

Barron said the project wanted to give investors a series of binary questions and data points, leaving it up to them how the data is integrated into financial analysis.

“If we started aggregating it, it would mean us taking views on rankings and scoring and things like that – which we just didn’t want to do because different investors will integrate it in different ways.”

The consultation also notes that aggregating all of the results into one figure or score could risk presenting a “misleading or uninformative” picture of the risks and opportunities.

“An aggregated country-level score could also distort financial flows by disincentivising investment in countries with a lower score that are at the earlier phases of their climate change journey,” it said.

As part of the pilot process, 25 countries accounting for around 70 percent of global emissions were benchmarked against the assessment. China, the US and Japan were assessed, as were smaller economies including Morocco and Kyrgyzstan.

Following the consultation, the countries will again be assessed against an updated framework and given the opportunity to provide feedback before the assessments are made public by the end of this year.

Increasing integration

Barron said she expected the framework to be widely picked up by investors and investor groups. The project has involved many major investor networks, including the Net Zero Asset Owner Alliance, which determines how members set targets, and the IIGCC, which runs the Paris-aligned Investment Initiative.

“The expectation is that they will take up the guidance and that investors globally who are setting or have set or want to set net zero goals will be using this framework to inform their investment-making decisions.”

Asset manager members of the project, which include Amundi and Franklin Templeton, “are obviously very keen to start using it themselves as an industry standard and actually start creating products off it”, Barron added.

The BT Pension Scheme, which like all UK defined benefit schemes has a lot of exposure to UK sovereign debt, will be looking to use the framework. Barron said the project had already been in contact with the UK DMO, as the UK is one of the 25 pilot countries, and that it had been “really interested”.

“Now that it’s done,” she said, “we’ll be picking up those conversations as ASCOR and I’m sure there will be a lot of interest from the Treasury on this piece of work as well as from GFANZ and all the net zero work that happens in the UK.”

The consultation also suggests that metrics in the assessment could form the basis of KPIs for future sovereign sustainability-linked bonds.

The consultation closes on 31 March.