The Net Zero Asset Owner Alliance (NZAOA), BT Pension Scheme and the Church of England Pensions Board are among a $5trn investor coalition backing a new tool to assess the climate performance of sovereign bond issuers.

The project for Assessing Sovereign Climate Opportunities and Risks, known as ASCOR, is also supported by Franklin Templeton, Ninety One, Allspring and MFS. The group has today called for feedback on a database intended to help investors integrate climate considerations into government bond analysis and stewardship.

“Governments aren’t like corporates – they don’t have investor relations teams or PR strategies, and they can’t always communicate their climate efforts well,” said Victoria Barron, who leads BTPS Management’s sustainability work and co-chairs ASCOR. “It’s often only when a country issues green bonds that investors are given a chance to ask a government about its climate programmes.”

Barron said she hoped the new database, which evaluates nations’ carbon emissions, climate policies and financing needs, will encourage discussion between issuers and bond buyers about how countries should ensure an orderly transition to net zero.

Victoria Barron at BTPS

Victoria Barron

The information can also be integrated into credit risk analysis, and used to create financial products such as green and sustainability-linked bonds.

Sovereign bonds have often been described as the ‘elephant in the room’ for responsible asset owners in Europe, who – despite heavy exposure – have struggled to develop net zero strategies for the asset class.

As there is no ability to become a shareholder in countries, traditional stewardship and engagement practices have been off limits for government debt portfolios. So has divestment, because of requirements like currency exposure.

There has been confusion about whether calculating carbon footprints at national level will result in significant double counting – accounting for emissions that have already been assigned to corporate bond portfolios. This approach could also penalise developing economies that are reliant on heavy industry, even if the products they manufacture are consumed in richer parts of the world.

Developing markets could also suffer if they are assessed on their emissions trajectories, because they are urbanising more rapidly than wealthier nations. This could result in climate scores or assessments that push up the cost of green capital for the governments most in need.

“ASCOR will allow users to access information about a country’s climate progress that a really experienced group of investors think is material,” explained Barron. “There is no rating or ranking or investment advice, just free, comparable data points for investors to use as they wish.”

For its pilot phase, ASCOR has looked at 25 sovereign issuers across emerging and developed markets, including the UK, Germany, Japan, Brazil and South Africa. The sample is estimated to cover some 70% of global greenhouse gas emissions, and represents at least 50% of constituents in flagship benchmarks.

The consultation, which asks stakeholders for their opinion on the key performance indicators used to assess government issuers, is open until 31 March. The final framework will be published at the end of the year.

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