Investor-led sovereign debt assessment framework revamps third pillar ahead of issuing first country reports.
The Assessing Sovereign Climate-related Opportunities and Risks (ASCOR) project has introduced climate spending indicators in its updated assessment framework to better inform investors on countries’ risk management.
ASCOR is an investor-led project working to develop a free, publicly available, independent tool that assesses countries on climate change, aims to improve investors’ understanding of the climate risks in their sovereign debt portfolios.
Antonina Scheer, Research Project Manager at the Transition Pathway Initiative (TPI) Centre and one of the methodology note authors, told ESG Investor the “most significant” changes centred on an “in-depth reworking” of Pillar 3, which has been renamed ‘climate finance’ from ‘opportunities to finance the transition’.
This framework was initially comprised of three pillars: emissions pathways (historical emissions trends and climate goal alignment), climate policies (national policymaking efforts on climate), and opportunities to finance the transition (the financing countries need to implement their climate goals).
Scheer explained Pillar 3’s change of name was made to cover a “clearer range” of finance-related topics, including international finance contributions, domestic disclosure and renewable energy opportunities.
ASCOR attempted to integrate new topics into existing indicators rather than creating new, separate indicators. However, Scheer said “one main exception” was made with the introduction of an entirely new area on government climate action-related spending disclosure and climate budget tagging under this renamed ‘climate finance’ pillar.
“This was an area missing from the previous framework and required in-depth research to develop an appropriate methodology, drawing on World Bank reports and other literature on climate budget tagging practices,” Scheer said.
“This was judged to be important enough to inform investors about how countries are managing climate risks to require a dedicated area in the framework,” she added.
Avoiding unwieldiness
While Scheer said a “variety of changes” had been made based on a public consultation was on the assessment framework, she stressed that ASCOR attempted to avoid creating an “unwieldly tool” that would be difficult to assess and deploy in decision-making.
Speaking to ESG Investor in August, Carmen Nuzzo, Executive Director of the TPI Centre, also underscored the need to “strike a balance” between adding indicators and being “realistic” about what was available, and what could be compared.
The public consultation underscored the importance of fairness and rationalising indicators to ensure the usefulness of the tool. Feedback from the consultation found “strong support” for ensuring fairness for middle and low-income countries.
“The main ways that feedback has influenced the framework is through revisions and removals of indicators,” Scheer said.
In its initial consultation document, ASCOR had a total of 19 sub-categories featuring a total of 55 ‘yes’ or ‘no’ indicators selected based on materiality, availability and comparability under the three pillars.
This number of sub-categories has now been reduced to 13 and the number of indicators slimmed down to 39.
The framework’s indicators are assessed using dedicated policy analysis of published government laws and executive documents, Scheer added, noting that when the tool is published in early December it will include source links for each indicator to assist users explore each topic based on their investment research needs.
The framework methodology’s publication is set to be followed by the release of assessments of 25 countries against revised indicators, including the UK, Australia, Bangladesh and Japan which collectively account for almost 70% of greenhouse gas emissions.
Reaching new shores
From 2024, ASCOR will conduct new assessments of sovereign debt-issuing countries, gradually expanding to country coverage.
The project is working to further expand country coverage beyond the 25 in December’s assessments, first to 70 countries but eventually covering more than 100 included in major sovereign bond indices.
“Over time, the ASCOR project is likely to revise the framework and methodology to remain relevant to both investors and issuers,” Scheer said. “For example, if specific reporting practices become common practice and standardised, new indicators or metrics may be added to the framework.”
She noted that this could potentially include a second consultation period.
ASCOR is backed by a coalition representing US$5 trillion AUM, including the UN Net Zero Asset Owner Alliance, investor network Ceres, the Institutional Investors Group on Climate Change, the UN-convened Principles for Responsible Investment and Sura Asset Management.
ASCOR is supported by advisory firm Chronos Sustainability, and its academic partner is the TPI Centre, which is based at the London School of Economics’ Grantham Research Institute on Climate Change and the Environment.
A key reason behind establishing ASCOR was to “enable and provide a structure” for investor dialogue with policymakers to set expectations and provide a “clear signal” on appropriate and ambitious climate action, according to Dr Rory Sullivan, CEO of Chronos Sustainability.
