Assessing Sovereign Climate-related Opportunities and Risks
Assessing Sovereign Climate-related Opportunities and Risks
Dr Rory Sullivan
Many institutional investors have made commitments to reach net zero and to significantly reduce the greenhouse gas emissions associated with their investment portfolios as part of their strategic response to climate change. While there has been significant progress in developing assessment tools and methodologies for many major asset classes including listed equity, corporate fixed income, property and infrastructure, the development of similar tools and methodologies for sovereign debt has lagged behind.
The ASCOR (Assessing Sovereign Climate-related Opportunities and Risks) project was established in 2021 with the aim of creating a practical tool to support investors in their assessment of sovereign climate-related risks and opportunities. In turn, the expectation is that this will enable investors to integrate climate risk considerations more systematically into bond valuations, to engage in dialogue with sovereign issuers to encourage the better management of physical and transition risks, to support investment risk assessment and decision-making (for countries and for corporates) and to facilitate transition funding.
In December 2023, ASCOR published its first assessment covering 25 major debt issuing countries, including US, China, UK and Brazil, together representing nearly 70% of global greenhouse gas emissions. The research showed that there has been significant progress on establishing framework climate legislation and on taking substantive action to reduce greenhouse gas emissions, but that only 4 of 25 countries have emission reduction targets that aligned with a 1.5°C pathway when historical emissions, income and population are factored in.
Chronos’ View
To successfully transition to a low carbon economy, governments need to act. ASCOR provides investors with investment-relevant, decision-useful information on the climate risks and opportunities of sovereign issuers. The fact that ASCOR is backed by so many large investors means that there is now a clear basis for investors to engage with sovereign issuers and a clear incentive for governments to accelerate their efforts to reduce greenhouse gas emissions.
Notes
1. For more information on ASCOR, please visit https://www.ascorproject.org/.
2. ASCOR’s academic partner is the Transition Pathway Initiative Centre, based at the Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science.
3. The Assessing Sovereign Climate-related Opportunities and Risks (ASCOR) project is led by asset owners, asset managers and investor networks. ASCOR is co-chaired by Victoria Barron at Brightwell and Adam Matthews at the Church of England Pensions Board. Esther Law at Amundi Asset Management and Claudia Gollmeier at Colchester Global Investors are currently serving as acting co-chairs.
4. Chronos Sustainability has provided technical support and guidance to the ASCOR project, advising on the assessment framework and criteria, reviewing reports and other outputs, and supporting the initiative’s governance and management.
5. The 25 countries assessed were: Australia, Bangladesh, Barbados, Brazil, Canada, Chile, China, Egypt, France, Germany, India, Indonesia, Italy, Japan, Kazakhstan, Kenya, Mexico, Morocco, Poland, Saudi Arabia, South Africa, Thailand, UK, Uruguay, and the US.
6. The ASCOR Steering Committee is composed of the Asia Investor Group on Climate Change (AIGCC), the UN-convened Net-Zero Asset Owner Alliance (AOA), Ceres, the Investor Group on Climate Change (IGCC), the Institutional Investors Group on Climate Change (IIGCC), Principles for Responsible Investment (PRI) and Sura Asset Management.
7. The ASCOR Advisory Committee includes Aktia Bank, Allspring Global Investments, Amundi Asset Management, Colchester Global Investors, Franklin Templeton, MFS Investment Management and Ninety One, who are among the funders of the project together with Brightwell and the Church of England Pensions Board.