PRI decides against including EMs for next phase of sovereign climate engagement initiative

Principles for Responsible Investment (PRI) has said that it will not include emerging markets in the first expansion phase of a sovereign climate engagement initiative, confirming that the next steps will be focused on developed countries.

Originally set up in 2022, the Collaborative Sovereign Engagement on Climate Change programme has so far focused on the Australian system, with the participation of 27 signatories with €9trn in assets from the Asia-Pacific, Europe and North America.

Tom Arup, PRI’s head of stewardship and sovereign engagement, said that despite hopes that the programme would be expanded to cover sovereign issuers in both developed and emerging markets, the group had decided not to include the latter in its initial expansion plans.

The decision to expand the initiative comes after a positive evaluation of the Australian pilot, according to Arup.

“We are still spending time working out the best approach to conducting this type of collaborative engagement and are likely to expand to two additional markets in the first instance, but we have decided emerging economies won’t be among them,” he said during a recent webinar.

“We want some more time to consider some important dynamics, such as debt traps, the interaction with multilateral development banks and other issues related to emerging economies before we integrate them into the engagement programme,” he said.

An announcement on which additional markets will be added to the initiative is expected to be made in January 2025, Arup added.

Expansion options

Sovereign engagement has been a slow-moving area of responsible investment so far although it is now gaining more supporters.

Up until a few years ago, most large investors did not include government debt in carbon-footprint calculations or climate targets, partly because of the limited scope for divestment and reallocation, and the fact that the sustainable finance industry has chosen shareholder engagement as its main tactic for achieving change to date.

Members of the Australian pilot, which includes Munich Re and pension investors LGPS Central and Rest, have so far been asking the government there for policies and guidance to address concerns about the risk climate change poses to their sovereign bonds, national economy and global financial stability.

Arup said the initiative has engaged with 44 unique sovereign entities and representatives across the Australian system, holding 27 meetings in the past year.

Looking ahead, Arup said the initiative is considering two approaches for the expansion phase.

One would be to pursue a “full engagement” that would roughly replicate what the initiative had done in the Australian pilot through establishing a relatively large group of signatories to engage in the system.

Another option was to go ahead with “preliminary engagement” with a more concentrated set of investors.

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