Sovereign Debt Investors Point to Emerging Market Gap in New Climate Risk Metrics | Asset owners

Measures that assess the risks and opportunities associated with climate change for sovereign states should carefully consider the different economic and social factors of each country, including the financing gap in the net zero transition between emerging and developed markets, said sustainability investing experts.

The remarks come as investors anticipate a tool developed by an international project driven by the UN to assess climate-related risks and opportunities, especially in emerging markets where data is less readily available.

The The Sovereign Climate Risk and Opportunity Assessment Project, or Ascor, is expected to identify a first set of metrics and indicators by the fourth quarter of this year, through its engagement with sovereigns.

Investors can use the tool to assess the feasibility and progress of governments’ net zero targets and their financial strength, and quantify the transition of countries and the physical financing needs of different issuers.

Kerry Adams-Strump,

Prudential

“As an institutional investor in sovereign bonds, we assess our exposure to sovereign risk, including through climate change,” said Kerry Adams-Strump, ESG group director at Prudential, noting that the life insurer previously used the ND-GAIN index for such purpose.

“We support the work that ASCOR seeks to accomplish. As a member of the Net-Zero Asset Owner Alliance, we provided our feedback on the project to support its goal of net zero and to meet the needs of our stakeholders and others,” Adams-Strump said. Asian investor.

Prudential operates in many emerging markets in Asia and Africa. As a life insurer, it must invest in local currency assets in accordance with regulation, responsibility and business logic to finance a better life for local residents.

Many of these markets are highly exposed to climate risks, but at the same time lack research and other public information to help assess transition risks and opportunities. Rather, more available and effective data would be helpful for asset owners like Prudential to engage in these markets, Prudential’s chief investment officer Liza Jansen said in a statement. previous interview.

NOTHING TO HIDE

More than two-thirds of the world’s population live in emerging markets, but only 10% of wealth comes from them. Meanwhile, emerging markets represent less than 10% of global sustainable finance.

“As emerging markets are likely to experience the physical effects of climate change and their associated costs to a disproportionately greater degree than developed markets, the ASCOR project does not want to rate or rank countries,” said Claudia Gollmeier, chief investment officer and Singapore Managing Director at Colchester Global Investors, which is one of the funders of the project, and members of the project’s advisory board.

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“Rather, the information presented will help investors better understand national transition and adaptation policies, as well as sovereigns’ progress towards their stated goals, by putting financing costs into perspective,” she said. . Asian investor.

Claudia Gollmeier,

Colchester Global Investors

The ASCOR project began in June 2021, chaired by BT Pension Scheme (BTPS) and the Church of England Pensions Board, representing over $5 trillion in assets under management worldwide.

Its main members are the UN-convened Net-Zero Asset Owners Alliance; Ceres; the Institutional Investors Group on Climate Change (IIGCC); the Principles for Responsible Investment (PRI); and SURA Asset Management. Other participants include asset managers and ESG research institutes.

After a year of research, the project has published its June annual report and specified seven key areas to focus on, including the full spectrum of government actions covering the whole economy and sectoral policies in areas such as carbon pricing, energy subsidies, transport, deforestation and land use planning.

The tool will also take into account the financial strength of sovereign states, their adaptability and their resilience.

Once the measures are developed, the project will apply them to 20 pilot countries, covering both developing and developed countries on different continents. The results will be published by the second quarter of 2023, followed by a public comment period during which global asset owners and managers will all be encouraged to participate.

“The ASCOR project team understands that sovereigns may be sensitive to the idea of ​​having their policies assessed on a comparative basis and their progress in implementing policies reviewed,” Gollmeier said.

Therefore, the project does not aim to suggest to country ministries how to formulate their policies related to climate change. However, it is hoped that by providing useful information to asset owners and investment managers, it will encourage all sovereign states to meet their climate change commitments and provide the opportunity for meaningful stakeholder dialogues. , she said.

Hopefully, such a tool will increase transparency and could lead to peer pressure among sovereigns to publicly highlight their progress, while Asia and other nations will appreciate the benefits of this tool and put it to good use. , she added.

THE MISSING PIECE

Jonathan Ho,

Allianz Global Investors

“Historically, the industry’s abilities to assess the sustainability progress of states have lagged, particularly when compared to abilities to measure corporate sustainability,” said Jonathan Ho, sustainability specialist at Allianz Global Investors.

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This is understandable, as corporate sustainability fits more easily into many common and existing ESG frameworks, he noted.

“The ASCOR project will be an important step in providing more decision-useful clarity on sovereign exposure to climate risks and their climate policies,” Ho said. Asian investor.

He stressed that context is critical to any meaningful analysis of sovereigns. “The challenge is that the contextualization and nuance make it difficult to generate apple-to-apple comparisons. Thus, the complexity is how the analysis can reconcile both contextualization and comparability.

He takes Hong Kong as an example. The city has a goal to increase the share of renewables in the energy mix to 7.5-10% by 2035. In absolute terms, the goal may seem low compared to goals in other jurisdictions. But given Hong Kong’s geographic constraints and its renewable energy potential, such a goal is already worthy of respect, Ho noted.

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Carol M. Barragan