Claire Hugo
Sustainable Fixed Income Senior Product Specialist
Julien Moussavi
Head of Sustainable Fixed Income Product
Key takeaways:
- A forward-looking approach: The PoC uses LSEG Nationally Determined Contributions Implied Temperature Rise (NDC ITR) to systematically reflect countries’ stated climate ambitions in sovereign bond index construction.
- Below 2°C across three sovereign universes: Based on July 2026 month-end index profiles, simulations for FTSE WGBI, FTSE EMGBI and FTSE EMUSDGBI achieve an aggregate NDC ITR below 2°C, while allocating at least 70% of index weight to countries with an individual NDC ITR at or below 2°C.
- A two-level methodology: Country reweighting is complemented by a security-level tilt that increases exposure to eligible green government bonds within each country allocation.
Points of differentiation:
- Focuses on sovereign transition ambition: Unlike approaches centred on realised emissions or broader climate-risk measures, the PoC uses countries’ stated NDCs and their implied temperature pathways as the sovereign-level signal. This provides a comparable, forward-looking measure of stated national climate ambition, rather than a measure of realised emissions reductions, policy implementation or the likelihood that countries will achieve their commitments.
- Combines sovereign and security-level signals: The methodology links country-level NDC ITR with a 2x weighting factor for eligible green bonds within each country allocation.
- Tested across developed and emerging sovereign bond universes: The same framework is applied to WGBI, EMGBI and EMUSDGBI, illustrating how the investment implications vary according to the underlying universe.
What does our research mean for investors?
The research illustrates how sovereign investors can systematically incorporate forward-looking national climate commitments into government bond portfolios. The simulations show the trade-offs involved in targeting a portfolio-level NDC ITR at or below 2°C, including changes in country allocations, yield, duration, tracking error and green bond exposure. Importantly, these effects vary across sovereign bond universes, highlighting the need to consider climate-related objectives alongside broader portfolio characteristics.
