Investing in government-backed entities in the Developed Market sector can benefit from insights gained from the Emerging Markets experience
In a world where climate change poses significant risks and opportunities, a new tool called ASCOR (Assessing Sovereign Climate Opportunities and Risks) is making waves in the investment community. ASCOR, now covering 90% of global greenhouse gas emissions, 92% of global GDP, and 100% of four key global government bond indices, is helping investors assess how sovereigns manage climate risks and opportunities.
The concept of the universal investor can be particularly useful in sovereign engagement on climate change with developed markets. This approach acknowledges the interconnectedness of sovereigns, corporations, and investors within the ecosystem a sovereign creates. It involves engaging not only directly with sovereign issuers but also collaboratively with corporate investors and other ecosystem participants to influence climate-related policies and practices.
However, challenges such as mandate restrictions, limited capacity, and access to meaningful data can hinder this engagement. To overcome these hurdles, investors can start with simple, clear financial structures and measurable key performance indicators (KPIs) related to climate goals embedded in bond covenants. Leveraging technical assistance frameworks and collaborations can also improve measurement, monitoring, and reporting, thereby tackling data limitations and governance capacity issues. Diversifying engagement strategies by including investments in multilateral development banks (MDBs) bonds with green intentions can contribute to climate impact goals indirectly.
Resources and frameworks such as the universal investor concept, guidance documents, working group reports, access to MDB bonds and their sustainability frameworks, academic and policy reports, and the Methane Finance Working Group’s guidance underpin these approaches.
Climate issues are not just about failed or thriving harvests or preventing natural disasters. They can also mean peace or war, default and downgrade. With the clock ticking for both planet and portfolio, it emphasizes the need for investors to engage with sovereigns on climate change.
On 21 October, Claire Meier Underhill will speak at the Annual Conference in London about this critical topic. The ASCOR framework, developed according to seven design principles, including using publicly available data, a transparent methodology, and avoiding adding to the reporting burden of sovereigns, is a testament to the importance of this engagement.
Moreover, in big, diluted developed sovereign bond markets, engagement from all investors, corporate or sovereign, is critical. The ASCOR framework was developed in line with the principle of common but differentiated responsibilities and respective capabilities enshrined in the UN Framework Convention on Climate Change (UNFCCC).
As we navigate the complexities of climate change, ASCOR provides a valuable tool for investors to engage with sovereigns, fostering a more sustainable and resilient future for all.
- The ASCOR framework, a valuable tool in climate change engagement, was developed according to the principle of common but differentiated responsibilities and respective capabilities, highlighting its relevance in both developed and developing markets.
- In light of the interconnectedness of sovereigns, corporations, and investors in environmental-science matters, the universal investor concept can be particularly useful in engaging with sovereigns on climate change, especially in big, diluted developed sovereign bond markets.
- Recognizing the financial risks and opportunities that climate change presents, investors can start to address engagement hurdles by leveraging simple, clear financial structures and measurable key performance indicators (KPIs) related to climate goals, thereby influencing climate-related policies and practices in the business sector.
