ASCOR sovereign bond climate checklist adds financing indicator

Investors may start assessing wealthy sovereign issuers on how well they are meeting international climate financing pledges under a new climate assessment framework for government bonds.

The checklist is being developed by a coalition of investors and investor groups to become the first “internationally agreed framework for assessing the climate-related risks and opportunities associated with sovereign debt instruments”. The latest iteration, published yesterday, follows a stakeholder consultation earlier this year.

A key deliverable for ASCOR, the group behind the framework, is to publish “independent and transparent” climate assessments of 25 countries against the framework by the end of 2023. These have been chosen based on their presence in major sovereign bond indices, and are said to represent around 70 percent of global greenhouse gas emissions.

The covered issuers will be given a chance to respond to the assessment prior to publication.

Members of ASCOR include Amundi, Ninety One, Franklin Templeton and groups including the PRI, IIGCC and Net Zero Asset Owners Alliance.

It is hoped that the open-source tool and standardised country assessments will inform investor engagement and also provide a way for countries to showcase their climate progress.

The framework has now been updated to include new indicators on climate finance contributions by high-income countries and domestic spending on mitigation or adaptation activities. Issuers will also now be assessed on whether they “intend to harness their transition-related potential” in areas such as wind and solar energy.

Other changes to the framework include the addition of indicators on government plans to phase out fossil fuel subsidies, whether governments have ratified UN human rights instruments and whether they have a strategy to create “decent green jobs” as part of the Just Transition.

A key change from earlier versions is the removal of physical climate risk exposures due to concerns that it would penalise middle- and low-income countries facing significant climate hazards that are outside of their control. “In this way, the emphasis of the ASCOR framework is on climate risk management by countries rather than exogenous exposure to climate hazards,” said the group in release notes.

The updated framework will now consider a total of 13 indicators, an increase on the nine indicators laid out in earlier versions, despite ASCOR promising to reduce the number of metrics earlier this year. At the time, the group said that “the number of indicators will be revised down… balanced against the need to provide comprehensive analysis, while ensuring realistic data delivery”.

ASCOR has been contacted for comment.

The inaugural assessment by the body will cover major Western economies, in addition to Brazil, Saudi Arabia, South Africa, Thailand, Indonesia and others. ASCOR has said that it intends to expand coverage to 70 countries, and subsequently to more than 100, subject to funding and organisational priorities.

Unlike equities or corporate bonds, there is currently no standardised way to assess the climate performance of sovereign issuers, which makes monitoring the delivery of portfolio decarbonisation targets difficult for investors.

An inaugural assessment conducted earlier this year by Japan’s GPIF found that UK and Canada government bond holdings would be most vulnerable to climate risks, compared to GPIF’s other sovereign debt exposures, losing up to 7 percent of their value, respectively, over the next 30 years.

Central banks are increasingly looking to do the same for their portfolios, said Reserve Bank of New Zealand (RBNZ) governor Adrian Orr in a speech yesterday.

“RBNZ’s balance sheet consists primarily of sovereign bonds for monetary policy implementation and foreign reserves management. Assessing a sovereign bond for its past and potential future exposure to climate-related risk requires data and careful consideration – especially when we are trying to minimise our credit and liquidity risks,” Orr said.

He noted that the bank is co-chairing a workstream at the NGFS central banking group on the topic and is currently identifying best practices for supervisors.

The European Central Bank already has a climate scoring system in place for the Eurosystem’s corporate sector holdings but is yet to start assessing sovereign bond holdings.