First assessment of countries’ climate risks for sovereign bond holders shows progress on climate laws; but investors warn of ‘ambition gap’

• Investor-led ASCOR project, supported by world’s major investor networks, publishes landmark assessment of 25 countries – including US, China, UK and Brazil, together representing nearly 70% of global greenhouse gas emissions. 
• New ASCOR tool shows emissions have decreased, over the past five years, in over half of assessed countries (14 of 25). Nearly the same share of countries (13) have passed legislation to enshrine an effective climate change response in law, a growing trend.
• However, only 4 of 25 countries have emission reduction targets aligned with a 1.5°C pathway when historical emissions, income and population are factored in. Only three of eight high-income developed countries met a minimum proportional level of 0.2% of GDP when contributing to the international $100 billion finance commitment for climate action.
• ASCOR results provide a basis for sovereign bond investors to engage with national issuers on climate risk. “Probably the single most helpful thing we as investors can do is to roll up our sleeves and engage practically with countries to focus on this ambition gap, and related finance, and work to close it” says Co-chair of ASCOR.
   

A new tool for sovereign bond investors, two years in development after extensive consultation with governments and investors, has published the first independent academic assessment of 25 countries’ climate targets and policies. The findings highlight a mixed picture of significant progress on framework climate laws, but a lack of ambition in targets to align with a 1.5°C pathway.

The independent analysis for the ASCOR tool was provided by the Transition Pathway Initiative Centre at London School of Economics and Political Science. The tool aims to empower sovereign bond holders to assess climate risks and opportunities in their investments and to support dialogue with governments for greater ambition.

Encouragingly, the research found that over half (13 of 25) of countries have passed a framework climate law, to enshrine an effective climate change response into their legal system. Most of these laws (11) involve accountability elements. Climate laws are a growing practice, with additional ones drafted and expected to be passed in South Africa, Thailand and Morocco.

Preliminary analysis by the OECD has found that the US$100 billion commitment may finally be met in 2023. The ASCOR analysis of these contributions shows that only three of the eight assessed high-income countries (Japan, Germany and France) contributing to this $100bn commitment met a minimum proportional level of 0.2% of GDP based on country-disclosed climate finance for 2020. Australia, Canada, Italy, UK and US did not meet this threshold.

The challenges ahead were also highlighted by the tool’s analysis of each country’s NDC (Nationally Determined Contribution), which are currently being discussed at COP28. It showed that zero of 25 countries have 2030 targets that align with a pathway to keep global warming to no more than 1.5°C. When each individual countries’ historical emissions, income and population are taken into account (a ‘fair share’ allocation) the ASCOR research shows only 4 of 25 (Bangladesh, Barbados, Kenya and Morocco) countries have climate targets aligned with their 1.5°C ‘fair share’ allocation.

The initial 25 countries assessed with the ASCOR framework (listed in notes to editor below) constitute a cross-section of geographies, income groups, levels of climate risk and types of policymaking systems that represent nearly 70% of global greenhouse gas emissions (and 50-80% of the main sovereign bond market indices). The ASCOR tool’s country coverage will expand to 70 in the short term (1-2 years).

ASCOR is supported by leading investor groups including the PRI, AOA, IIGCC, IGCC, Ceres, AIGCC, a large number of individual investors and has four co-chairs who commented:

Victoria Barron, Co-Chair of ASCOR and Head of Sustainable Investments, Brightwell said:

“The ASCOR tool will, for the first time, provide investors with decision-useful information, in an easily accessible way, on the climate risks and opportunities of sovereign issuers. This is a major step forward and will help put climate change at the heart of sovereign investment decision-making.”

Adam Matthews, Co-chair of ASCOR and Chief Responsible Investment Officer, Church of England Pension Board said:  

‘The clear message from the ASCOR research is that without the enabling regulatory environment any commitments made by companies and investors will simply not be delivered. This enables countries to have confidence they have the finance they need to meet greater ambition. Probably the single most helpful thing we as investors can do beyond our own individual commitments is to roll up our sleeves and engage practically with countries to focus on this ambition gap, and related finance, and work to close it.”

Esther Law, Co-chair of ASCOR and Senior Investment Manager EM Debt and Responsible Investing Lead, Amundi Asset Management said:

“The ASCOR tool is a vital comprehensive and practical climate assessment framework for sovereigns, and addresses the lack of standardisation and data issue. Using ASCOR, not only can investors customise the framework to evaluate climate-related risks, but also form a strong basis for engagement with Sovereign issuers to collectively improve the quality and depth of the sustainable market.”

Claudia Gollmeier​​​​, Co-Chair of ASCOR  and Managing Director (Singapore) & Senior Investment Officer, Colchester Global investors said: said:

“ASCOR is the first collaboratively developed sovereign climate assessment tool allowing investors to evaluate sovereigns on climate change and sovereigns to showcase progress. We finally have a unique tool that will improve issuer reporting and allow us investors to have a more informed engagement dialogue with issuers.”

Carmen Nuzzo, Executive Director at the Transition Pathway Initiative Centre, LSE, said:

“ASCOR is not a financial risk tool but, by evaluating how countries manage climate mitigation and adaptation risks, it will enhance the analysis of their fiscal sustainability. It is about fair pricing and impact, not politics.”

Antonina Scheer, Research Project Manager at the Transition Pathway Initiative Centre, LSE, who led the research said:

"The ASCOR tool will drive accountability by informing investor conversations with sovereigns on climate targets and policies. With COP28 hosted by a major oil producer, it is time to have such discussions, especially on contentious but crucial topics like fossil fuel phaseouts, in a way that is driven by transparent and rigorous data."

As a member of the ASCOR Steering Committee and representing the UN-Convened Net-Zero Asset Owner Alliance, Udo Riese of Allianz also commented:

“The ASCOR framework provides the necessary transparency for asset owners to assess the progress of sovereigns in implementing the Paris Agreement. We see ASCOR as a new developing standard that could also guide sovereigns to make their bonds more attractive to climate-conscious investors.”  

Mahesh Roy, Director, Investor Strategies at IIGCC added:

“We welcome this first publication of ASCOR’s methodology, an important investor led initiative that will help to better facilitate investors’ assessment of sovereign climate performance and guide their engagement with issuers. Ultimately, we hope this will help investors increase inclusion of sovereign bonds into their individual net zero investment strategies, a goal we are also working towards at IIGCC. Congratulations on this first big milestone and we are looking forward to its continued development.”

Pete Ellsworth, Senior Director, Ceres added:

"Ceres encourages investors with sovereign bond portfolios to familiarize themselves with the ASCOR framework and data in order to better understand how the governments whose debt they’re investing in are supporting the transition to a low carbon economy."   

The ASCOR tool took two years to build and is the fruit of an unprecedented collaboration between asset owners, asset managers, investor networks and sovereign bond issuers. It was developed through in-depth dialogue with investor partners and underwent a rigorous public consultation involving input from diverse stakeholders including country governments, international financial institutions and civil society.

ASCOR’s academic partner is the Transition Pathway Initiative Centre, based at the Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science. The project is supported by Chronos Sustainability. 

The findings echo the recent Emissions Gap report from UNEP which finds that greenhouse gas emissions in 2030, based on policies in place, are projected to increase by 3% per cent. Predicted 2030 greenhouse gas emissions must fall by 42% for the 1.5°C pathway.