Pension schemes aim to bring clarity to how sovereign bonds link with climate risk. Piyasi Mitra speaks to Victoria Barron, of British Telecom’s in-house asset manager, about how to ensure emerging markets get help and recognition.
If climate change is gaining ground as a way to future-proof investment portfolios today, then unlike other asset classes such as equities or corporate credit, sovereign bonds have not been “tackled”, according to Victoria Barron.
Barron is head of sustainable investment at BT Pension Scheme Management, the primary investment provider to the UK BT Pensions Scheme, and manages around £47 billion (€53 billion).
She is also co-chair of the Assessing Sovereign Climate-related Opportunities and Risks (Ascor) project, which was launched in February.
“At least $3.5 trillion (€3.25 trillion) is needed annually to finance the transition to arrest global warming to 1.5 degrees Celsius as per the Paris Agreement, but that is not happening,” says Barron.
Ascor is a coalition of asset managers and owners that invests $5 trillion collectively. BT Pension Scheme Management and the Church of England Pensions Board spearhead the project, which was developed in collaboration with the Transition Pathway Initiative, the Global Climate Transition Centre based at the London School of Economics and Political Science, and Chronos Sustainability.
A fundamental view underpins the Ascor project, which is that no partnership between the sovereign debt triad of investors, issuers and climate finance stakeholders is feasible without objective methods to assess transition investment opportunities.
Ascor recently consulted publicly about the framework needed to achieve this. There are 25 countries in a pilot scheme and Ascor intends to have a final framework in place and country assessment complete by the end of 2023. This should consist of a free, publicly available, globally standardised investor database assessing climate action, alignment and investment opportunities within sovereign bonds. The online tool should help investors achieve their net-zero goals, while issuers could use it to showcase their progress in addressing climate change, says Barron.
Assessment, not rankingData for use by investors centres on three pillars. The first two consider the performance of countries in climate change management, including emission trends, net-zero targets and climate policies. Pillar 3 is about finance opportunities created as countries adapt or mitigate climate change.
The objective is not to rank countries, explains Barron. “Instead, we are undertaking national-level analysis of countries’ emissions, climate policies and transition investment opportunities. Also, the objective is not to highlight areas of improvement for issuers. That would be for investors and stakeholders to determine.”
Ascor will also only consider climate framework laws for countries with “key accountabilities” – in other words, specific accountable entities, their compliance assessments, reporting methods and any course of action upon non-compliance.
“Many countries think they do not have a voice at the table.”
“Ascor not only takes into account climate laws set by countries, but it also assesses a wide range of emissions, policy and transition information points. However, the ‘climate laws of the world’ is one of the data points used in the framework,” says Barron.
The ‘climate change laws of the world’ database by Grantham Research Institute and the Sabin Center at Columbia Law School covers climate and climate-related laws and policies promoting low-carbon transition, reflecting the relevance of climate policy in areas such as energy, transport, land use and climate resilience. The ‘climate change litigation of the world’ database features climate litigation cases from over 40 countries.
The Ascor approach is also to eliminate irrelevant indicators, such as the coal mine moratorium for countries that do not operate coal mines. China and the US have both enacted temporary moratoria in the recent past – essentially agreeing not to open new coal minds.
The framework acknowledges that middle and low-income countries may achieve net zero later than 2050 and hence evaluates high-income countries against an accelerated net-zero deadline of 2045. The framework assesses their progress on mitigation “fairly” by examining the trends in their emission intensities of purchasing power parity-adjusted GDP.
Alignment with the 1.5°C limit on global warming in line with the Paris Agreement will be assessed using a country-specific benchmark. As per UN-approved mitigation scenarios, the subdivisions will be calculated on three equally weighted variables: population, PPP-adjusted GDP per capita, and historical emissions. Simply put, countries with higher populations, lower GDP per capita and lower historical emissions could expect a higher emissions budget in 2030.
Voice of emerging economiesIndicators evaluating countries by the level of financial contribution they receive to support a ‘just transition’ is another aspect of evaluation. For example, the Just Transition Partnership launched at the G20 sees South Africa receiving grants from wealthier nations.
“Many countries think they do not have a voice at the table,” says Barron. The Ascor team has gone to “painful” lengths to ensure an equitable, fair and just network, she adds.
Middle and low-income countries will inevitably struggle to resolve transition risks. To acknowledge the disparity, the Ascor framework uses ‘phase-down finance’ – where capital invested in ‘emitting assets’ can be used to support carbon reduction targets – as a core element of the just transition away from fossil fuel dependence. Ascor also factors climate shock absorbers into the framework. One indicator identifies member countries of a ‘catastrophe risk pool’ offering insurance solutions against disasters and climate shocks.
“For investors, this is an opportunity to refine and enhance their sovereign credit rating work in a way that they may not be able to do presently.”
Drawing lines in the process of selecting the best indicators was one of the biggest challenges, Barron says. “We had a long list of determinants – for example, biodiversity, natural habitat loss, etc.” Another challenge was handling mismatched and out-of-date sovereign data.
Understanding how sovereign debt impacts social issues will be pivotal, and she is hopeful about more stakeholders backing the project who see the value in having “a common language”.
“Latin America’s largest pension fund provider has joined hands with us. The World Bank has given its feedback, and we are in conversation with the International Monetary Fund and other development banks,” says Barron.
“This is the best time for emerging economies to get involved in resolving challenges investors are keen to understand. For investors, this is an opportunity to refine and enhance their sovereign credit rating work in a way that they may not be able to do presently.”
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