“Executive Summary:
“Sovereign portfolios are not immune from climate and sustainability risks. A meaningful part of central bank investments consists of sovereign bonds or quasi-sovereign debt securities, such as sub-sovereign or agency securities. Sovereign bonds typically have a special role in central banks’ balance sheets. Domestic sovereigns are instrumental to monetary policymaking while foreign sovereigns are a core feature of reserve management. Fundamentally, they typically have characteristics (liquidity, risk) that are unique within the investment spectrum. These considerations tend to affect investment decisions of central banks. However, climate and sustainability risks can affect any kind of security. As the management of these risks falls squarely within the mandate and duties of central bank investment managers, this Technical Document (TD) first considers sovereign portfolios in a discussion about climate risks. Secondly, it considers the issue of achieving a carbon emissions reduction impact via investment management, which goes beyond a narrow definition of risk management and can be considered by those central banks whose mandate is consistent with this objective. This TD does not consider portfolios of sovereigns held for monetary policy purposes.
“Sovereign debt securities are different in their characteristics from other securities, such as corporate bonds and equities. They have so far received relatively less attention when it comes to data, metrics, methodologies, and available tools for assessing climate-related risks, opportunities, or impact. As this TD demonstrates, the relevant metrics and data are typically freely available and of high quality. However, established methodologies to translate relevant climate metrics into investment decision-relevant outputs (e.g., modelling techniques to map climate risks into sovereign credit risk and sovereign bond prices) are still being developed. Some of the difficulties discussed in this TD are conceptual. Therefore, the implementation of climate-related considerations for sovereign debt portfolio management remains challenging.
“This TD provides a reference for central bank (and potentially other) investment managers on some of the most relevant issues and information sources, with a two-fold objective:
• Providing a “one-stop-shop” summarizing a range of relevant data sources and metrics, and discussing their pros and cons, with a focus on freely available and high-quality sources. To this end, this TD builds on a small number of recently published key reports as well as on the framework developed by the Assessing Sovereign Climate-related Opportunities and Risks (ASCOR) Project – a key investor-led initiative focused specifically on sovereign securities and their climate-related risks and opportunities. In addition, this TD covers sovereign climate risk indices, sovereign ESG scores, green and other sustainable bonds, as well as climate sovereign bond indices– all of which are options that central bank investment managers may be considering.
• Discussing implementation issues and constraints. In implementing their investment strategy for sovereign debt portfolios, central banks face a series of challenges, that are illustrated in what follows. For instance, they will need to decide how to best combine their climate-related objectives with their primary (financial) investment objectives (Figure 1). The range of implementable investment solutions will thus depend on this combination. In addition, there are several practical and conceptual implementation challenges. For instance, just transition issues prominently feature among the latter…”
Read (and/or download) the full report here.
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