The purpose of this paper is to outline ways in which government bond investors can take climate risks in their investment approaches into account. It presents and articulates the climate methodology that underpins the FTSE Advanced Climate World Government Bond Index (Advanced Climate WGBI) in detail, emphasizing the rationale behind each climate pillar (transitions risk, physical risk, and resilience) and also qualifying the chosen calibration.

Overview:

  • Climate change is a substantial challenge, which is expected to have a significant impact on global economies, both in terms of its physical effects and mitigating efforts.
  • There exist multiple, distinct design and methodological challenges associated with incorporating climate risks into government bond indexes. We characterize these risks into three distinct types: Physical, Transition and Resilience.
  • To date, investors have focused mostly on climate risk at the corporate or asset level (particularly listed equities). Consequently, government bond investors risk overlooking the impact of climate change on their portfolios.
  • As climate risks accelerate, they are increasingly gaining attention from government bond investors, However, there remains a lack of climatebased investment products in fixed income, particularly in sovereigns.
  • We introduce the Advanced Climate Index Series in this paper, which builds on the pioneering launch of the Climate WGBI in 2019; it has been designed for index-users with a focus on improving the climate performance of their government bonds investments.