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Toward Paris-Aligned Sovereign Investment Portfolios: Utilizing Implied Temperature Rise as a Measure of Alignment

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  • Dylan Dunlop-Barrett

Abstract

Investors are increasingly adopting Paris-aligned strategies to better manage climate risks and opportunities. Despite sovereign debt investments making up approximately half of global bond markets, frameworks for assessing Paris-alignment for sovereign portfolios are still in their infancy. This paper firstly advocates for Implied Temperature Rise (ITR) as a metric which investors can use to assess portfolio Paris-alignment, and to capture the embedded transition risks in current sovereign holding. It then proposes a new ITR methodology, further refining existing methodologies. This methodology differs from existing methodologies in that is does not rely on benchmark emission pathways, which we believe yields less volatile and more accurate results. Furthermore, the methodology can more easily include updated global temperature data, and takes a consumption based approach to emissions. Finally, the paper provides a worked example of the methodology, utilizing a hypothetical sovereign portfolio.

Suggested Citation

  • Dylan Dunlop-Barrett, 2025. "Toward Paris-Aligned Sovereign Investment Portfolios: Utilizing Implied Temperature Rise as a Measure of Alignment," Working Papers 833, DNB.
  • Handle: RePEc:dnb:dnbwpp:833
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    File URL: https://www.dnb.nl/media/55lp4g5e/working_paper_no-833.pdf
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    References listed on IDEAS

    as
    1. Patrycja Klusak & Matthew Agarwala & Matt Burke & Moritz Kraemer & Kamiar Mohaddes, 2023. "Rising Temperatures, Falling Ratings: The Effect of Climate Change on Sovereign Creditworthiness," Management Science, INFORMS, vol. 69(12), pages 7468-7491, December.
    2. Martin Leduc & H. Damon Matthews & Ramón de Elía, 2016. "Regional estimates of the transient climate response to cumulative CO2 emissions," Nature Climate Change, Nature, vol. 6(5), pages 474-478, May.
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    More about this item

    Keywords

    responsible investment; Paris-alignment; sovereign investments; implied temperature rise;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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