Index-provider FTSE Russell is launching the first government bond index of countries in the economic and monetary union of the European Union that adjusts country weights based on climate risk.
The index provides a forward-looking assessment of these countries’ climate risks, such as the expected economic impact of transitioning to Paris Accord target greenhouse gas levels by 2050. On a relative basis, it then applies tilts to the sovereign markets that indicate a greater amount of resilience and preparedness to deal with the risks of climate change.
When backtesting to 2001, the climate risk index results in a 16 per cent reduction of climate risk and a seven per cent reduction in greenhouse gas emissions compared to the underlying market-value weighted European government bond index.
The index uses climate scores from ESG-analytics provider Beyond Ratings, which is owned by the London Stock Exchange Group.
“There is increasing awareness of how sovereign states are uniquely exposed to the risks of climate change,” said Sylvain Chateau, co-founder and chief operating officer of Beyond Ratings, in a press release. “This has, in part, driven client demand for climate risk-adjusted fixed income indexes since the launch of climate [world government bond index], particularly from European investors. With this launch, the climate [European government bond index] now offer European sovereign debt investors an efficient means to quantitatively assess and reduce climate risk and GHG emissions in their portfolios.”
The London Stock Exchange Group also owns FTSE Russell.