A Framework to Align Sovereign Bond Portfolios with Net Zero Trajectories

55 Pages Posted: 26 Jul 2023

Date Written: July 19, 2023

Abstract

Asset owners and asset managers have a key role to play in the global transition towards a low-carbon economy, and their actions have been coming under increasing scrutiny by the public. Hence, methodologies to examine the alignment of assets with net zero trajectories are becoming a necessity for all investors. The question is how to build a net zero portfolio without incurring financial risks across different asset classes. New methodologies have been emerging for equity and corporate bond portfolios to gauge and manage these risks. They include common frameworks such as the EU Paris Aligned Benchmark and the EU Climate Transition Benchmark. However, no common framework has been developed yet for sovereign bonds.

Nevertheless, sovereign bonds are one of the largest asset classes. It is thus paradoxical that there is very scarce literature available on sovereign portfolio net zero alignment. In our view, there is an urgent need to address this problem since governments now have the levers to influence all economic players to take environmental issues into account.

In this paper, we propose an alignment framework for sovereign bond portfolios, comprising definitions, databases, metrics and models. We then apply our framework to a global universe.

Keywords: net zero portfolios, decarbonisation, transition, sovereign bonds alignment, portfolio alignment, climate change

JEL Classification: G11, Q5

Suggested Citation

Barahhou, Inès and Ferreira, Philippe and Maalej, Yassine, A Framework to Align Sovereign Bond Portfolios with Net Zero Trajectories (July 19, 2023). Available at SSRN: https://ssrn.com/abstract=4515462 or http://dx.doi.org/10.2139/ssrn.4515462

Inès Barahhou (Contact Author)

Kepler Cheuvreux ( email )

112 avenue Kleber
Paris, 75016
France

Philippe Ferreira

Kepler Cheuvreux ( email )

112 avenue Kleber
Paris, 75016
France

Yassine Maalej

Kepler Cheuvreux ( email )

112 avenue Kleber
Paris, 75016
France

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