FTSE Russell is launching a government bond index that weighs countries’ preparedness and resilience to climate change risk.
A spin-off of the FTSE world government bond index, the new FTSE climate risk-adjusted world government bond index will include the sovereign bonds of 22 developed markets.
In order to establish its climate-risk weightings, FTSE is using modelling developed by Beyond Ratings, an environmental, social and governance analytics provider.
“Climate change and the efforts required to mitigate its impact carry numerous risks that have not historically been incorporated into investment grade government debt,” said Rodolphe Bocquet, chief executive officer of Beyond Ratings, in a press release. “However, these issues have a direct and long-term impact on government finances, with projected expenditure on climate mitigation expected to reach almost US$1 trillion a year for the next 30 years according to the United Nations’ Intergovernmental Panel on Climate Change. Beyond Ratings has developed a quantitative and transparent approach to climate risk modelling and assessment that will help investors mitigate these risks.”
The index gives each market a climate score; the higher it is, the lower the climate risk exposure to that economy. Each country is assessed along three major themes. First, transition risk, which measures the impact on the country’s economy from the efforts required to meet the Paris Accord targets. Next, physical risk measures the economic effect of tangible climate impacts, like rising sea levels, agricultural damage and extreme weather conditions. Finally, the country’s economic resilience measures how prepared it is to cope with climate change.
“Governments are at the forefront for catalyzing and enabling the economic transition to a low carbon economy,” said Waqas Samad, group director of information services of the London Stock Exchange Group. “The integration of economic and financial risk considerations linked to climate and sustainability into sovereign bond portfolios is still nascent. The launch of this index will allow the market, for the first time, to access a quantitative climate risk assessment for sovereign debt. Investors can now incorporate climate change risk considerations into their fixed income portfolios, and this could also inform their engagement with sovereigns.”