A new climate risk government bond index has launched, allowing investors to incorporate climate change risk considerations into portfolios for the first time.
Global index provider FTSE Russell launched the FTSE Climate Risk-Adjusted World Government Bond Index (Climate WGBI) yesterday, allowing investors to consider a quantitative measure of climate risk to sovereign debt for the first time, it said.
Derived from the firm's World Government Bond Index, the new option will be available to investors as both a portfolio performance measurement tool and the basis of an investment portfolio.
FTSE Russell said the new index followed the same rebalancing mechanics of the standard index with respect to universe membership, but would tilt the market value weights of the standard index according to a country's climate scores, which are assessed according to that country's scores across three core climate risk pillars.
|Sponsored by Allianz Retire+|
Help your clients find their 'mojo' in retirement
Transition risk - The impact of efforts to mitigate climate change risk on a country and its economy
Physical risk - The climate-related risk to the country and its economy from climate change's physical effects
Resilience - A country's preparedness and action to cope with climate change
The single combined score is then used to reweight the country's exposure in the index. Countries better prepared for the risks of climate change receive higher exposures, while those more threatened by the risks receive lower exposures.
"The objective of the index is to reduce climate risk compared to the standard FTSE World Government Bond index while minimising tracking error," FTSE Russell said.
Beyond Ratings chief executive Rodolphe Bocquet said the ESG analytics provider - whose climate risk modelling is used in the index - had developed both a quantitative and transparent approach to climate risk modelling which could help investors mitigate the investment risks of climate change, which he noted had not historically been incorporate into investment grade government debt.
"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," Bocquet said.
London Stock Exchange Group (LSEG) director of information services Waqas Samad said integration of economic and financial risk considerations linked to climate and sustainability into sovereign portfolios needed to improve. Having acquired Beyond Ratings recently, Samad said LSEG was delighted to contribute to the index.
"Governments are at the forefront for catalysing and enabling the economic transition to a low carbon economy," Samad 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."