A framework to assess sovereign bond issuers on climate change: consultation report

The impacts of climate change become more severe and the pressure on governments to act increases as each year passes. As part of their strategic responses to the risks and opportunities presented by climate change, investors are making overarching commitments to contribute to the transition towards net zero greenhouse gas emissions by significantly reducing the emissions associated with their investment portfolios. These commitments are spreading across portfolios. However, unlike other asset classes such as equities or corporate credit, there is currently no internationally agreed framework for assessing the climate-related risks and opportunities associated with sovereign debt instruments. Additionally, while there is a variety of sovereign data available, they can be incomplete, inconsistent or outdated. This limits investors’ ability to conduct appropriate climate-related financial analysis and to engage in an informed way with governments on climate change. Subsequently, the climate-related investment case remains unclear. To remedy this, a global coalition of asset owners and managers with over US$5 trillion in assets under management, supported by international investor networks, came together in 2021 to create the Assessing Sovereign Climate-related Opportunities and Risks (ASCOR) Project. The aim is for every sovereign-debt-issuing country eventually to be assessed against a framework that will analyse emission pathways, climate policy action and opportunities to finance the transition. To promote transparency and build trust, the framework and assessments will be made freely available in an open-source online tool. The ASCOR framework will also focus on fairness, recognising the principle of common but differentiated responsibilities that underpins the United Nations Framework Convention on Climate Change (UNFCCC). The benefits of this framework for sovereign issuers and investors are numerous. For issuers, this tool will open communication channels and facilitate greater dialogue with private investors. Through ASCOR’s independent and transparent assessments, issuers may more easily demonstrate their climate change progress to investors over time. The ASCOR Project will help build investor confidence in governments’ climate change goals and thereby encourage capitals flows that will support job creation, infrastructure improvement, and pollution reduction. The framework has been created with investors for investors, but unlike many other approaches, it will be shaped in consultation with sovereign issuers. With a clearer picture of how governments are positioned, investors will have relevant information to integrate into decision-making to reduce their exposure to climate risk and increase their financing of climate opportunities. The ASCOR framework and country assessments will also help prioritise issuer engagement efforts to support increased ambition and help investors meet their net zero and just transition commitments. The public consultation process we are undertaking will contribute to developing the framework further and ensuring it is fit for purpose. We welcome feedback from all stakeholders on the framework and look forward to seeing you at the webinar and regional roundtables which will be run during 2023.