April 19, 2021

How to measure the temperature of sovereign assets

FTSE Russell and Beyond Ratings offer a methodology to assess countries’ implied global warming temperatures based on their national commitments concerning climate change mitigation, as per their NDCs (“Nationally Determined Contributions”), submitted to the UNFCCC. This approach is particularly relevant for investors who want to assess their alignment with climate targets (e.g. 2°C targets), and the underlying risks resulting from exposure to countries presenting a misalignment with these targets.

The FTSE Russell’s and Beyond Ratings’ methodology, which assesses that the warming temperature of NDCs remains above 3°C globally, is built on the proprietary CLAIM model (Climate Liabilities Assessment Integrated Methodology); it enables forward-looking assessments of countries alignment with long-term climate goals. In particular, this solution allows assessing country GHG emissions budgets consistent with a global 1.5°C or 2°C target (or any other target). In addition, it can compare these budgets with those derived from the political commitments of countries, and estimate a temperature equivalence by country.

This paper represents an introduction to:

  • the key principles of the CLAIM budget assessment model;
  • the variables used in the model and key outputs;
  • the approach applied to assess country temperatures beyond carbon budgets;
  • the climate equation used in this analysis.

Our approach to measuring the temperature (implicit global warming trajectory) of sovereign investments consists of four simple key steps: (i) assessing 2°C carbon budgets by country; (ii) evaluating gaps between these budgets and the emissions level induced by countries’ policy commitments; (iii) estimating countries’ temperatures resulting from these gaps; and (iv) calculating aggregate results based on portfolios or benchmarks.