Global index, data, and analytics provider, FTSE Russell has announced the launch of its first climate risk government bond index, the FTSE Climate Risk-Adjusted World Government Bond Index, which will help adjust each country’s preparedness and resilience to climate change risk.
The index, which was derived from the FTSE World Government Bond Index which incorporated investment-grade sovereign bonds of 22 developed economies, would aim to assess the climate risks sovereigns face and tilt towards government markets that showed a greater degree of resilience and preparedness to the risks of climate change.
Following this, each country would be evaluated against three core climate risk pillars, assuming the higher the index-weighted Climate Score, the lower the climate risk exposure.
The three pillars were:
- Transition risk – the impact on the country and its economy from the required efforts to meet the Paris Accord
- Physical risk – the climate-related risk to the country and its economy from the physical effects of climate change such as sea level rise, exposure of the economy to potential agricultural damages and climate-related natural disasters such as extreme weather
- Resilience – a country’s preparedness and actions to cope with climate change, measured based on the strength of national institutions, level of social and economic development
The index would utilise climate risk modelling developed by Beyond Ratings, a respected environmental, social and governance (ESG) analytics provider recently acquired by LSEG.
“Governments are at the forefront for catalysing and enabling the economic transition to a low carbon economy. The integration of economic and financial risk considerations linked to climate and sustainability into sovereign bond portfolio is still nascent,” Waqas Samad, group director of information services, LSEG, said.
“The launch of this index will allow the market, for the first time, to access a quantitative climate risk assessment for sovereign debt. Investors can now incorporate climate change risk considerations into their fixed income portfolios, and this could also inform their engagement with sovereigns.
“We are delighted to incorporate the expertise of the Beyond Ratings team, now as part of FTSE Russell’s extended ESG capabilities, on this ground-breaking index.”
