A new FTSE Russell index measuring the impact of climate change on global fixed income markets is revealing how Canada ranks compared to other developed nations on climate readiness and provides insight into the biggest climate-related risks facing Canadian investors.
FTSE Russell’s FTSE Climate Risk-Adjusted World Government Bond Index (Climate WGBI), introduced earlier this year, measures the performance of local currency investment grade sovereign bonds of 22 developed global markets. It adjusts index weights according to each countries’ relative exposure to climate change based on three climate risk factors – transition risk, physical risk and resilience risk.
While Canada ranks near the top in physical risk, its ranking is less strong in resilience and transition risk. Here is how Canada measures up relative to its developed market peers:
- 1. Physical risk. Risk due to physical effects of climate change such as weather events.
Canada rank in Climate WGBI – 5 out of 22 countries. Most other developed countries are more exposed to direct physical risks, such as rising sea levels or natural disasters.
- 2. Resilience risk. A country’s preparedness and ability to cope with climate risk.
Canada rank in Climate WGBI – 18 out of 22 countries. Canada’s resilience (i.e., institutional, social, economic and ecological) are below average, and not enough to counterbalance its transition challenges.
- 3. Transition risk. The impact from required efforts to meet Paris Accord mandated standards for greenhouse gas emissions.
Canada rank in Climate WGBI – 21 of 22 countries. This is one of the key challenges Canada faces in improving its overall climate risk, especially given the importance of the oil and gas sector in Canada’s economy.
“Canadian investors are thinking about ‘greening’ their portfolios to capture opportunities afforded by climate change. However, climate opportunity – as well as risk - is not easily measured,” said Marina Mets, managing director of product management at FTSE Russell Canada. “In collaboration with Beyond Ratings, part of LSEG's Information Services Division, FTSE Russell has developed a proprietary climate risk measurement methodology so that investors can better understand in detail the risks as well as the opportunities that climate change presents as well as the dynamic nature of these risks. We’ve initially developed our methodology around sovereign bonds and are working to extend this same lens to Canada’s corporate and provincial bond sectors.”
Paul Bowes, head of FTSE Russell Canada, adds that while Canada has some work do on the climate front, Canadian investors are more and more aware of these issues and are tackling them. Several Canadian companies positioned in the first quartile of the Asset Owner Disclosure Project (AODP) Global Climate Index 2018, and Canada already has 132 signatories in the Principles for Responsible Investments (PRI), 41 of which joined in 2018 or 2019. “We have seen our Canada investor clients become much more focused on climate change in recent years and they are asking more and more questions on how this issue might impact their portfolio strategies. Canadian investors are very thoughtful on this issue and very interested in the measures we offer.”
For more information on FTSE Russell's ESG and sustainable investment indexes, go to the FTSE Russell website.
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