FTSE Russell, the global index, data and analytics provider, has launched the world’s first government bond index that adjusts index weights based on individual country’s preparedness and resilience to climate change risk.
Derived from the FTSE World Government Bond Index, a widely used benchmark of investment-grade sovereign bonds of 22 developed economies, the FTSE Climate Risk-Adjusted World Government Bond Index, otherwise named as ‘Climate WGBI’, allows sovereign debt investors to incorporate climate change risk considerations into their portfolios.
Waqas Samad, Group Director of Information Services, LSEG said, “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.”
This is the first time that a quantitative measure of climate risk has been applied to sovereign debt. The higher the index-weighted Climate Score, the lower the climate risk exposure. The objective of the index is to reduce climate risk compared to the standard FTSE World Government Bond index (WGBI) while minimising tracking error.
The above index would be available to investors going forward as a portfolio performance measurement tool as well as for the basis of an investment portfolio.
Each countries’ climate risk would be assessed by three core climate risk pillars, namely Transition Risk, Physical Risk and Resilience.
Transition Risk represents the impact on the country and its economy from the required efforts to mitigate climate change encompassed by GHG emission reduction needed to meet the Paris Agreement target of less than 2 degrees Celsius of Global Warming and the recent trend of historical carbon emissions, measured on 15 variables including GDP per capita, energy intensity of GDP and carbon intensity of energy production.
Physical Risk refers to the climate-related risk to the country and its economy from the physical effects of climate change, such as the sea level rise, exposure of the economy to potential agricultural damages and climate-related natural disasters such as extreme weather.
Meanwhile, Resilience represents 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.
Climate scores are calculated based on a transparent methodology and updated on an annual basis each April month-end. Countries are scored across each of the pillars and a single combined score is derived for each country. Country scores are then used to reweight the country’s exposure in the index to provide higher exposures to countries that are better prepared for climate change and vice versa.