Investors seeking to integrate measures of climate transition risk into the portfolio management process **can now benchmark against countries’ climate preparedness via a new set of Bloomberg indices.
The Bloomberg Government Climate Tilted Bond Index family integrates carbon-reduction performance and other factors into sovereign bond indices. They are built with Bloomberg’s proprietary Government Climate Scores, which assess a government’s relative preparedness in the transition to a low-carbon world using transparent, data-driven indicators.
The 14 indices were launched this week to cater to growing demand for country-level sustainability investment tools. Already a handful of large financial clients have plans to use the indices and demand has come mainly from Europe, where nations and their companies operate under strict environmental regulations. The indices are designed to consider countries’ progress against climate ambitions and provide a window into future outlook against those ambitions, said Chris Hackel, head of sustainable indices at Bloomberg.
“Over the past few years, a lot of our clients have put out funds and new products that are based off corporate debt or equities and incorporate decarbonisation or transition goals, but there’s been increasing demand in the market for approaches that incorporate these considerations for country debt,” Hackel told ESG Insight. “What we’ve seen clients looking for here is a particular measure of how well a country is prepared for the transition to a low-carbon economy.”
Big Business
Data companies have been busy building new indices as expanding regulatory sustainability obligations prompt investors to seek benchmarks against which to track and test their investment theses. S&P Dow Jones, Arabesque and ISS ESG have all launched ESG-focused gauges in the past year. Bloomberg has also been active in the index building sector, launching several sustainable fixed-income benchmarks, as well as Paris-aligned benchmarks and other climate transition indices.
Indices are also big business in the passive investment sector. According to Bloomberg News, 90 per cent of ESG-focused ETFs track indices.
The latest family of Bloomberg gauges derive their firepower from Bloomberg’s Government Climate Scores, which assign weighted values to countries based on a three-pillar assessment. They factor a nation’s carbon transition, its power sector transition and its climate policy.
The carbon and power sector pillars incorporate metrics on present and future performance while the climate policy measure takes into consideration governments’ net-zero commitments, their level of green bond issuance and the scope of their power policy. The scores’ standard calculation methodology also can be customised to stress specific client objectives, such as placing an emphasis on carbon emissions performance.
Datasets
Scores are nourished by Bloomberg’s own datasets, including those from its BloombergNEF (BNEF) business, and the final scores are applied to bonds of all tenors issued by each nation.
“The Bloomberg Government Scores informing the indices represent how much progress each country is making relative to other countries in terms of meeting its Paris Agreement goals and transitioning its energy sector to a low-carbon economy,” said Hackel.
Unsurprisingly, given the region’s emphasis on ESG integration within its financial sector, European countries outperform nations from elsewhere in Bloomberg’s Government Climate Scores. French, Italian and British bonds top the scores list. At the lower end of the scale, China trails the US and Japan.
That is also seen in the demand profile, which is centred largely on European clients. Hackel said those investors are also looking for aggregated indices to help them take a broad-based approach to fixed income climate investing.
Nevertheless, Bloomberg is seeing “significant engagement” from US asset owners, in particular, Hackel said, adding that Asian clients had also shown interest.
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