The global sovereign debt market is one of the largest asset classes in the world, yet fixed income markets have typically lagged other asset classes in relation to ESG integration activities. Sovereign debt investors are exposed to a range of climate change risks that are typically not well understood or incorporated in the investment process. Part of the challenge has been the lack of sustainable investment products and viable climate data.
The FTSE Climate Risk-Adjusted World Government Bond Index (Climate WGBI) offers investors a solution that they can credibly implement. It measures the performance of fixed rate, local currency, investment grade sovereign bonds incorporating a tilting methodology that adjusts index weights according to each countries’ relative exposure to climate risk, with respect to resilience and preparedness to the risks of climate change.
Quantitative climate risk assessments are made across three climate risk pillars covering:
- Transition risk - impact on the economy from the required efforts to mitigate climate risk as measured by modeled emissions needed to meet 2 degree alignment
- Physical risk - the climate related risk to the country and its economy from the physical effects of climate change, and
- Resilience - a country’s preparedness and actions to cope with climate risk