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. 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 Government Bond Index Series offers a range of solutions that investors can viably implement into their investment process. The indexes measure 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 – the level of climate related risk exposure of the country’s economy as measured by the distance to reach the modeled emissions needed to meet a 2 degree alignment
- Physical risk - the level of climate related risk exposure to the country and its economy from the physical effects of climate change
- Resilience - a country’s preparedness and actions to cope with its level of climate related risk exposure