AUM in Action

ASCOR Framework Furthers Fairness Focus

Ahead of Q4 release, sovereign-focused project plans to streamline indicators and avoid “penalising emerging markets” with “synthetic” climate rankings.

A new era of investor engagement with governments could be unleashed by the impending update to the Assessing Sovereign Climate-related Opportunities and Risks (ASCOR) project’s assessment framework, covering 25 countries. 

The investor-led project is working to develop a free, publicly available, independent tool that assesses countries on climate change and aims to improve investors’ understanding of the climate risks in their sovereign debt portfolios. 

ASCOR’s tool uses a framework of indicators and a database of country assessments to present the progress being made by governments on managing the low-carbon transition and the impacts of climate change. 

Carmen Nuzzo, Executive Director of the Transition Pathway Initiative Global Climate Transition Centre (TPI Centre), told ESG Investor that ASCOR will allow investors to track sovereigns’ efforts toward their net zero targets and the national determined contributions (NDCs) to which they’ve committed by signing the Paris Agreement in 2015. 

Many governments have made these commitments, but it is “not specified anywhere” how they’re planning to meet them and there is a lack of clarity on the policies being putting in place to achieve the targets, she added. 

NDCs are expected to be a key focus at COP28 due to the advent of the Global Stocktake, which will benchmark countries’ efforts to reduce emissions since the Paris Agreement.  

Following the publication of the initial ASCOR framework, a public consultation was held from February to April 2023, which underscored the importance of fairness and rationalising indicators to ensure the usefulness of the tool. 

ASCOR is set to publish the updates to its framework in October or November, followed by the release of assessments of 25 countries against revised indicators. These include the UK, Australia, Bangladesh and Japan, and collectively account for almost 70% of greenhouse gas emissions.  

ASCOR is supported by 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 (LSE GRI).  

It is backed by a coalition representing US$5 trillion AuM, including the UN Net Zero Asset Owner Alliance, Ceres, the Institutional Investors Group on Climate Change (IIGCC), the Principles for Responsible Investment (PRI) and Sura Asset Management. 

Encouraging engagement 

One of the key goals of the ASCOR project is to encourage continued engagement, with participants hoping it will “facilitate dialogue” between issuers and investors and drive the financing of climate mitigation, adaptation and the just transition. 

Dr Rory Sullivan, CEO of Chronos, told ESG Investor that investors have previously been unsure on how to best engage with sovereigns to “encourage them to take action on climate change”.  

“Not only are investors interested in engaging with sovereigns as part of their net zero commitments, but they’re also interested in understanding sovereign-related exposures, risks and opportunities more generally,” he added.  

Nuzzo said ASCOR had been constructed primarily as a tracking tool, but also to “give an opportunity to sovereigns to showcase the progress that they’re making” as well as a “creative space for dialogue between investors and sovereigns on these issues”.  

According to Nuzzo, engagement between investors and governments should “help streamline” dialogue, allowing governments to address the “initial basic questions” more easily, enabling greater focus on “more substantial ones”.  

“Investors are also interested in where capital is going to be needed for the low carbon transition, which countries need the most capital, and where those countries creating the right policy conditions for investors to invest,” Sullivan said.  

Nuzzo added that the tool aims to enable discussion over information or policy gaps, encouraging governments to be more transparent and explicit when they present their energy or budget policies. 

Earlier this year, credit ratings provider Fitch Ratings warned that almost 20% of global corporates could face rating downgrades by 2035 due to climate vulnerabilities if such risks are not mitigated. Research from the Institute for Energy Economics and Financial Analysis also found that credit ratings are failing to accurately account for climate-related risks. 

Sovereign bonds, already under pressure, could face a similar risk if governments do not take greater action on climate change. By October last year, Fitch had made 21 downgrades across 11 different emerging market sovereigns and just six upgrades, noting that it was the second worst year for downgrades on record in such markets. 

A joint study between the University of East Anglia and University of Cambridge suggested that a global failure to curb carbon emissions could place 59 sovereigns at risk of “climate-induced” credit ratings downgrades by 2030 and 81 by 2100. 

In 2022, sovereign bonds represented almost 40% of the US$100 trillion global bond market, according to the World Bank, adding that they are typically the largest asset class in many institutional investors’ portfolios. 

Fairness focus  

The feedback from the ASCOR consultation found “strong support” for “ensuring fairness for middle and low-income countries”.  

The responses also emphasised the need to recognise common but differentiated responsibilities enshrined in the UNs Framework Convention on Climate Change, which “underpinned the development of the framework”.  

Nuzzo said that the ASCOR framework had been constructed “not to produce a synthetic indicator that would allow a ranking”. 

“We deliberately didn’t want to rank countries to avoid having emerging markets inevitably being penalised by this sort of measurement,” she added.  

Nuzzo noted that for some countries, which are “particularly exposed” due to their economic structure being heavily dependent on agriculture or tourism, how they “might be affected by physical climate risk” has traditionally been considered by ASCOR.

To further increase this fairness focus, ASCOR has incorporated the topics of just transition and international climate finance into the framework.  

The framework includes a ‘just transition lens on climate policy’ sub-theme. This is comprised of three indicators that examine whether a country has a just transition strategy that involves social dialogue with workers and engagement with affected communities; has a national Just Transition Commission or equivalent; or addresses the “regressive effects of carbon pricing or fossil fuel subsidy reform”, currently or in future.  

Nuzzo added ASCOR’s 25 focus countries featured a mix of developed and emerging markets “precisely to show diversity”.  

“Usable and clear” 

ASCOR also intends to revise down its number of indicators to ensure that the tool is “usable and clear”. 

The ASCOR framework is composed 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).   

In its initial consultation document, ASCOR had a total of 19 sub-categories featuring 55 indicators under these three pillars.  

The responses highlighted an interest in “prioritising performance indicators that enable sovereigns to showcase progress”, as well as flagging the need to “streamline the analysis on sovereign climate performance”. 

“We needed to strike a balance because we could have added lots of indicators,” Nuzzo said, “but in putting together the framework we had to be reasonable and realistic about what was available, and what could be compared.” 

She underlined that ASCOR needed to select the “most salient” indicators and the ones that were “judged to be the most useful for investor analysis” to be carried forward.  

Expanding awareness 

In addition to the planned Q4 releases, ASCOR is also working to expand country coverage, first to 70 countries but eventually covering more than 100 included in major sovereign bond indices. 

It also intends to continue engagement and outreach with both investors and other stakeholders to “keep getting their feedback,” Sullivan said, to ensure ASCOR’s value is “clear to all potential stakeholders”. 

“We need to get both investors and sovereigns to use it because ideally we would like this to be the ‘go to’ place for sovereign assessment of climate,” Nuzzo added. 

She also said that there “might be further developments” to the tool with some emerging markets being “very keen” to have a nature-related component included in it. 

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