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ASCOR, PCAF Sovereign Debt Frameworks Promise Climate Transparency

Initiatives offer breakthrough for asset owners looking to align their sovereign debt investments with net zero; open door to engagement with governments. 

A new framework proposed by a US$5 trillion AUM coalition aims to support investor efforts to assess sovereign issuers’ climate risks and align sovereign debt investments with net zero. 

“If asset owners want to set net zero targets on sovereigns, the first step is always transparency of emissions,” Udo Riese, Global Head of Sustainable Investing at Allianz, a member of the UN-convened Net Zero Asset Owner Alliance (NZAOA), told ESG Investor, noting there was “no well-known accepted methodologies” on how sovereigns measure and report their emissions when the alliance first tried to tackle the issue two years ago.  

A new framework published today by the Assessing Sovereign Climate-related Opportunities and Risks (ASCOR) Project outlines a set of indicators and a database of country assessments detailing low-carbon transition progress made by governments. It is designed to address “incomplete, inconsistent or outdated” sovereign data, according to backers.  

The framework has been developed in partnership with investors and in consultation with issuers and international finance organisations so as to avoid an “unnecessary proliferation of different sovereign climate frameworks”. It follows the recent release of new guidance to investors and financial institutions on measuring the financed emissions of sovereign debt.  

“The ASCOR project is so necessary because it’s about more than the emissions of sovereigns,” added Allianz IM’s Riese. “It will be more granular and will open points for discussions with sovereigns as to how to engage [on climate].” 

“The idea of sovereign engagement is relatively new,” Riese added. “Investors can’t tell sovereigns what to do, but they can inform on climate risk and climate progress, and outline what will make sovereign bonds more attractive to investors.” 

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. Research published by the Bank for International Settlements (BIS) said that the market for green, social and sustainability bonds reached US$2.9 trillion outstanding by the end of June 2022.   

New financial architecture  

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).  

Each of the pillars has three core themes, such as ‘emissions trends’ under emissions pathways, and a series of ‘yes’ or ‘no’ indicators selected based on materiality, availability and comparability. 

The emissions pathways and climate policies pillars aim to inform investors about the effectiveness and performance of sovereigns in managing climate change, the report said, while the third pillar outlines the landscape of climate risks and opportunities that each country faces. 

Prior to the launch, 25 pilot countries that collectively cover nearly 70% of global greenhouse gas (GHG) emissions, including Australia, Bangladesh and Japan, were tested against the indicators. Low- and middle-income countries will be exempt from a number of these indicators, such as setting a national 2050 net zero target, while richer jurisdictions will fall under stricter assessment factors, including whether they are contributing to the pledged US$100 billion in annual climate finance for poor nations.  

“Through this framework, we are putting in place a vital part of the financial architecture necessary to unlock the private finance flows that governments need to achieve their national climate ambitions,” said Adam Matthews, ASCOR Co-Chair and Chief Responsible Investment Officer of the Church of England Pensions Board.  

“The framework provides clarity about the public disclosures investors require to play their part in supporting the transition.” 

ASCOR was established in 2021 by NZAOA, Ceres, the Institutional Investors Group on Climate Change (IIGCC), the Principles for Responsible Investment (PRI) and Sura Asset Management. It is supported by Chronos Sustainability, and its academic partner is the Transition Pathway Initiative (TPI) Global Climate Transition Centre, which is based at the London School of Economics’ Grantham Research Institute on Climate Change at the Environment (LSE GRI). 

The framework proposal is open to feedback until 31 March, after which a summary of responses and an explanation as to how feedback will be incorporated will be published. The previously assessed 25 countries will then be reappraised against the updated framework. 

The online ASCOR tool and updated assessments will be published by the end of 2023. From 2024, the ASCOR Project will conduct new assessments of sovereign debt-issuing countries, gradually expanding to country coverage. 

“ASCOR is the first tool allowing investors and sovereign issuers to sing from the same hymn sheet on climate change,” said Carmen Nuzzo, PRI’s Head of Fixed Income and Co-Chair of ASCOR’s Climate Policy and Funding Working Groups.  

“It is the fruit of a major collaborative effort which, if now sustained by broad adoption, can turn ASCOR into ‘the’ industry reference framework for sovereign debt investors and issuers. It is a unique opportunity for both audiences to coalesce around a final unified tool, thereby delivering increased consistency across sector practices.” 

Defining sovereign emissions  

ASCOR’s proposed framework follows the release of the Partnership for Carbon Accounting Financials’ (PCAF) second version of its Global GHG Accounting and Reporting Standard for Financed Emissions, in December, extended to include a new methodology for financed emissions in sovereign debt.  

Its work on sovereign debt was informed by 22 PCAF participants, including NZAOA and BlackRock.  

Financial institutions reporting in line with PCAF are expected to report sovereign borrowers’ absolute Scope 1 emissions, as well as their Scope 2 and 3 emissions, in line with its definitions, which mirror the approach of GHG Protocol’s classifications for corporate and city emissions. 

Scope 1 covers domestic production GHG emissions, PCAF said, including consumption and exports.  

PCAF is also encouraging measurement of consumption emissions (the demand side of sovereign emissions). Scope 2 covers GHG emissions occurring as a consequence of the domestic use of grid-supplied electricity, heat, steam, and/or cooling which is imported from another territory. Scope 3 emissions are those which are “attributable to non-energy imports as a result of activities taking place within the country territory”.  

The report acknowledged there are limitations to measuring consumption emissions, such as the time lag in data availability and the challenges accurately allocating emissions along the supply value chain.  

“PCAF has taken a pragmatic view [with its methodology],” noted Allianz RM’s Riese. “Having a greenfield approach instead and thinking theoretically about the best way to report emissions, even if the data is not fully there for the majority of countries, would not have been helpful for asset owners because we want to report now, not in ten years’ time.” 

NZAOA members have been asked to report in line with the PCAF and ASCOR guidance, according to the alliance’s third edition target-setting protocol. 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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