Climate Change Risk in Sovereign Bond Investments 

Despite US threats to withdraw from the historic Paris climate agreement, momentum continues to build globally for carbon risk disclosure and management in the investment community. According to Moody’s, widespread adoption of the agreement and the coordinated actions of governments to reduce carbon emissions over time has “the potential to become a significant ratings driver in a broad set of industries.” While carbon disclosure on the part of investors has been focused almost entirely on equities, and to lesser extent corporate bonds, investors with sovereign bond holdings are coming to realize they also face carbon risk exposure.The sovereign bond market is one of the largest asset classes, representing a remarkable $21 trillion in outstanding debt by national governments. Further, sovereign bonds typically represent a significant percentage of diversified investment portfolios, especially among institutional investors. But the lack of clarity on methodological approaches has been a major obstacle for assessing climate risk in sovereign bonds.To address this gap, Global Footprint Network and South Pole Group convened a group of nine asset owners and managers* to examine the methodological issues involved and develop a set of recommendations, which are laid out in a new report: Carbon Disclosure and Climate Risk in Sovereign Bonds.As described in the report, climate risk at the country level is multi-faceted, but a comprehensive dashboard to manage investment risk can be organized as part of three key elements: • Carbon exposure or “transition risk”, including dependence on fossil fuel reserves and the carbon intensity of the economy;• Physical climate change risk, including a country’s exposure to extreme weather events, water scarcity, and food price shocks; and• A country’s policy response including its adherence to climate agreement pledges (Nationally Determined Contributions, or NDCs)

Source: Topic of the month February 2017: Climate Change Risk in Sovereign Bond Investments — yourSRI – Socially Responsible Investments

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