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Beyond Ratings Weekly Digest

Your briefing on augmented financial risk analysis

N°122 ▪ 24th November 2017



Sovereign assets in climate reporting: not yet mainstream but growing


“How Are Investors Addressing Article 173 for the Sovereign Asset Class?”

With investors in France required to release reporting on the requirements of Article 173 this year, Beyond Ratings has decided to take a closer look at how asset owners and asset managers have responded to this reporting requirement for the sovereign asset class.

Based on a sample of 36 representative asset owners and managers in France (of large and medium size), we observe that Article 173 is already starting to have an impact on investors:

  • most of these investors have started publishing reporting to comply with Article 173;
  • ESG strategies and policies are becoming increasingly mainstream, and the sovereign asset class is referenced in 55% of ESG strategies in our sample;
  • two thirds of the investors in our sample (24) have conducted a carbon footprint;
  • more than 20% (8) already report on the carbon exposure of their sovereign assets;
  • several investors are planning to extend their reporting based on internal analysis that they are already conducting and developing.

Communication of investment portfolio carbon footprint (left) and sovereign asset class (right)

Source: Beyond Ratings

The French Energy Transition law, Article 173 is the first piece of legislation to introduce mandatory climate reporting requirements for institutional investors. It is noteworthy as it strengthens the need for reporting across all asset classes, including sovereign bonds. At the same time, it corresponds to a broader context of growing expectations on carbon and climate disclosures from investors (see the TCFD Recommendations Report published in June or the work conducted by the HLEG at the EU level).

While several initiatives have recently emerged to analyse investors’ climate reporting, such as work from Novethic/PRI, the AODP (annual index), INDEFI, KPMG, or The Shift Project, few references are made to sovereign assets. We believe that climate reporting on sovereign debt is set to increase for at least three reasons. that the first is due to their size: sovereign assets often represent a very large share of assets owned or under management. Second, the current shift towards stronger reporting (Article 173, TCFD…) calls for more comprehensive approaches encompassing all the market’s main asset classes. Last but not least, we should bear in mind that, when it comes to climate change, a large part of the solution is in the hands of governments. Corporates have of course a big role to play (including private investors), but solving the climate challenge is largely a matter of what countries will agree to do and will actually implement following COP 21 and the decisions to come. Their contributions are essential.

Based on our study, it appears that the focus of carbon footprint assessments remains stronger on corporate assets and that these assessments are becoming increasingly mainstream. Two thirds of the investors in our sample have conducted a carbon footprint. However, we have observed a fast development of carbon footprint assessments applied to sovereign assets in the recent period. More than 20% of the investors in our sample have already started reporting on such analyses, and several of them have conducted at least internal assessments.

Sovereign carbon assessments are thus expected to continue growing, and the purpose of our note was also to formulate some recommendations on what we see as important in this context. This includes improving how the sovereign asset class is taken into account, such as selecting indicators that allow for aggregation or comparison with corporate data, developing further energy transition and physical climate risk indicators, coping with the need for multiple criteria analysis framework, or preparing for harmonisation of methodologies that could come in the future.

You can find more information on these elements in our short note, and we would be glad to discuss them further with you.

Guillaume Emin, Project Manager




Sovereign Risk

German business climate at its highest ever despite political turmoil

German real GDP growth and IFO Business Climate

The German IFO index of business climate stood at its all-time high in October (116.7), suggesting that economic growth has remained buoyant thus far in the fourth quarter. Furthermore, the last real GDP growth figure for Q3 2017 was very strong at +2.8% on a year-on-year basis, led by exports end investments. In addition, the country’s unemployment rate was 5.6% in October, its lowest since the reunification 25 years ago. While the German economy is booming, political uncertainty is tarnishing this trajectory. Indeed, following the last election on September 24th, Chancellor Angela Merkel and her Christian Democratic Union (CDU) started negotiations with the Free Democrats (FDP) and the Green Party to form a “Jamaica coalition” but these negotiations failed on November 19th. While the Federal President could call for a new election, President Steinmeier seems reluctant to do so, at least at this point, because of the risk that fringe parties – notably Alternative for Germany (AfD) – could garner even more votes than they did in September. In short, Germany seems set for a period of political uncertainty, but the fundamentals of the country are solid, and the markets do not seem very worried about the solution that will be found in this political turmoil.

Sources: Beyond Ratings, National data



Have you ever heard of the Sendai Framework for Disaster Risk Reduction?

Global multi-hazard average annual loss

COP 23 in Bonn has just ended with limited enhancements and the 2°C target seems increasingly out of reach. Meanwhile, risks of extreme weather events are becoming more common. Munich-Re assessed that overall average losses for the past ten years reached USD 154bn, and some 25,400 lives were lost as a result of natural catastrophes in 2015. The same year, UNSIDR launched the Sendai Framework, a 2015-2030 programme that aims at reducing the substantial reduction of disaster risk and losses in lives, livelihoods and health. It is the first of the world’s post-2015 development agreements. It was followed by two other major intergovernmental accords creating a global consistent approach to tackle key stakes for humankind: “Transforming our World: the 2030 Agenda for Sustainable Development”, adopted in September 2015; and the December 2015 “Paris Agreement on climate change” signed during COP21. The circle is complete.

Sources: Beyond Ratings, GAR-United Nations, 2015


Carbon/Climate Change

Land-use change represents 31% of cumulative emissions over 1870–2016

Historical cumulative emissions by source

We often speak about CO2 emissions but this is not the only greenhouse gas and it represents “only” 75% of annual emissions (CAIT/WRI). Likewise, GHG emissions are often linked to energy use (and this is true for slightly less than 75% of the total) but they also come from other sectors such as land-use change and forestry (7%) along agriculture (11%) and industrial processes (7%). Deforestation can be a massive cause of emissions. This is far less the case today than one century ago, but a recent analysis by the Global Carbon Project showed that land-use change still represents 31% of cumulative emissions since 1870, close to the share of coal (32%) and above oil (25%) and gas (10%). A question is to what extent could the downtrend in the land-use proportion of the global total accelerate, if massive reforestation was conducted globally in the face of climate challenges.

Source: Beyond Ratings, Global Carbon Project





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© Beyond Ratings 2017

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Photo credit via Visualhunt/CC BY-SA or other: Front page ▪ Credit 1: CECAR – Climate and Ecosystems Change Adaptation R; Credit 2: Tony Webster; Credit 3: Kiefer.; Crédit 4: NASA Goddard Photo and Video / Research notes ▪ Credit 1: DnDavis (via; Credit 2: zhu difeng (via Fotolia); Credit 3: Mny-Jhee (via Fotolia); Credit 4: xmentoys (via Fotolia)


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