A group of asset owners has started experimenting with engagement strategies to help get their sovereign bond portfolios to net zero.

The United Nations-backed Net Zero Asset Owner Alliance (NZAOA) launched its fourth ‘target-setting protocol’ today, in which it has updated its expectations for members when it comes to setting science-based climate targets across their assets.

It has expanded the coverage of the protocol to include all private markets portfolios, in a bid to increase scrutiny on the contribution of unlisted assets to net zero goals.

Concerns have been growing in recent years about a trend for large listed companies, under pressure from shareholders with climate commitments for their public equities portfolios, to sell their most polluting assets to private players.

In its new guidance, NZAOA points out that carbon intensive assets should be decommissioned as part of asset owners’ climate targets, not sold to entities outside the portfolio.


The only major asset class that the Alliance’s 89 members still don’t have to publish targets for is sovereign bonds.

“For our members, government-related bonds are enormously important – up to a third of all assets are allocated to this asset class,” said Günther Thallinger, head of investment management and sustainability at Allianz and chair of the NZAOA steering group.

“We simply cannot work without sovereign bonds.”

He explained that NZAOA had developed an approach to sovereign bonds based on a framework called ASCOR – short for ‘assessing sovereign climate opportunities and risks’ – which provides data points on topics such as a country’s carbon emissions, climate policies and financing needs.

ASCOR has been spearheaded by asset owners including the UK’s BT Pension Scheme and the Church of England Pensions Board.

climate change

NZAOA points out that carbon intensive assets should be decommissioned as part of asset owners’ climate targets

In today’s document, NZAOA said it “intends to deploy a group of indicators for which data are available in the ASCOR database”.

“For each sovereign, the score will be defined as the fraction of all elements with a positive indication,” it continued.

Alliance members will be required to test the assessment approach this year, and report on the results next year.

However, in order to set a target under the NZAOA protocol, asset owners have to identify the engagement process they will use.

“Which means we need to figure out how we engage governments,” Thallinger told IPE, adding that the Alliance has “some ideas about how we do this, mirroring our engagement approach with corporates and asset managers”.

But, he continued, “we need to bring more to the party when it comes to being governments’ financial partner” compared with those in the private sector.

This should include considering how sovereign bonds support a ‘just’ climate transition, in which communities and workers are protected from things like job losses and price increases that might result from a shift to a green economy.

Thallinger also said asset owners should think more about their role as asset allocators into blended finance and impact investment vehicles that can help governments raise funds outside the debt capital markets to address climate change.

A pilot focused on sovereign engagement is now underway.

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