Article Demo
Change starts with this main body quote and planting a seed. When Pictet launched its water equity investment strategy back in 2000, investments targeting positive change and sustainability were virtually unheard of. Two decades later, such strategies are mainstream and thriving.
Responsible investment has taken equity markets by storm. Although its penetration into fixed income markets has been slower, it is picking up speed there too. Yet one area remains overlooked – government bonds.
That’s a major oversight. After all, governments set the rules and regulations that companies and individuals follow, and without their support and investment, the world will not be able to tackle its most pressing problems – climate change in particular.
Global average temperatures are already 1.2C higher than they were in the pre-industrial era. And even if countries deliver on all the carbon emission-cutting pledges made so far, that degree of warming is expected to double to 2.4C by 21001.
Fixed income investors have a key part to play in providing the capital required to keep climate change in check. While individually, investors have a negligible influence on government policy, collectively they can make a real difference – after all, the investment community holds USD88 trillion in bonds issued by governments and their agencies2.
Focus on emissions
So how might fixed income investors construct government bond portfolios in a way that has biggest possible impact in the fight against climate change?
Investors in emerging market bonds are central to the transition. That’s because developing economies are more vulnerable to the physical impacts of global warming than their developed counterparts, in part due to geographical factors, but also because of weaker economic and institutional underpinnings. At the same time, emerging nations can be global leaders in many of the technologies needed for transition. But investors in developed sovereign bond markets also have a key role to play in the transition.
In all cases, however, the key to climate-focused government bond investing is high-quality data and the ability to draw accurate conclusions from it. Only then can investors be sure of making sound capital allocation decisions.Identifying ESG-aligned government bonds requires investors to focus on the root cause of global warming – greenhouse gas emissions. While methane and nitrous oxide clearly play a part, CO2 accounts for 74 per cent of all emissions3.
Our research shows that emissions of the different greenhouse gases tend to be correlated; countries with high emissions of one tend to also generate a lot of the others.The next question to tackle is how to measure and compare emissions by country. In absolute terms, bigger countries will obviously have larger greenhouse gas emissions than smaller ones. On this measure, China the biggest emitter. Looking at things on a per capita basis paints a somewhat different picture, however. Mongolia comes out in the “lead” while China emits less than the US, Russia or Australia.4An even more effective way is to compare emissions relative to the size of the economy – after all, it is the total level that matters from the point of view of climate.
