FTSE Russell launches first climate risk government bond index

Waqas Samad

FTSE Russell has launched the world’s first government bond index that adjusts weights based on each country’s resilience to climate change risk.

Derived from the FTSE World Government Bond index (WGBI), the FTSE Climate Risk-Adjusted World Government Bond index offers exposure to sovereign bonds from 22 developed economies.

Using climate risk modelling developed by ESG analytics provider Beyond Ratings, the index tilts towards government markets that demonstrate a greater degree of resilience to the risks of climate change.

Each country is assessed by three climate risk pillars. “Transition risk” measures the impact on the country and its economy from the required efforts to meet the Paris Accord 2.0°Celsius target, measured on 15 variables including GDP per capita, energy intensity of GDP and carbon intensity of energy production.

“Physical risk” is the climate-related risk to the country and its economy from the physical effects of climate change including rising sea levels, exposure of the economy to potential agricultural damages and climate-related natural disasters such as extreme weather.

While “resilience” represents a country’s readiness to cope with climate change, based on the strength of national institutions and the level of social and economic development.

Climate scores will be calculated on an annual basis at the end of April while the index will follow the rebalancing mechanics of the standard WGBI.

Drilling down on ESG and factors with Scientific Beta

Waqas Samad (pictured), group director of information services at the London Stock Exchange Group, commented: “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 portfolios is still nascent.

“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.”

Profiting on ESG

Rodolphe Bocquet, CEO of Beyond Ratings, added: “Climate change and the efforts required to mitigate its impact carry numerous risks that have not historically been incorporated into investment grade government debt.

“However, these issues have a direct and long-term impact on government finances, with projected expenditure on climate mitigation expected to reach almost $1 trillion a year for the next 30 years according to the United Nations’ Intergovernmental Panel on Climate Change.”

Leave a Reply

Your email address will not be published - please refer to our privacy policy to see how your details are handled.