Authors
ING is a global financial institution offering banking services, including lending, investment, and advisory solutions, with a strong focus on sustainability and innovation. ING is the initiator of this investment solution, ultimately partnering with FTSE Russell and Robeco to refine the sovereign climate assessment and bring the solution to the market.
FTSE Russell, an LSEG Business is a leading global index provider, known for creating transparent, rules-based benchmarks. FTSE Russell developed and launched the FTSE Climate Collective Transition EMU Broad Government Bond Index, which reweighs sovereign bond exposures based on countries’ climate performance. Their role was to translate the climate assessment and resulting scores into a robust, investable index that drives capital toward climate leaders.
Robeco is a global asset manager with a strong track-record in sustainable investing, offering a broad range of strategies across asset classes and investment styles. As part of this collaboration, Robeco launched the Robeco Climate Euro Government Bond UCITS ETF – an actively managed fund that mirrors the green characteristics of the Climate Index while optimising for risk and return. The ETF makes the investment solution accessible to investors and ensures alignment with both financial and sustainability goals.
Key takeaways:
- Governments are at the forefront of the fight against climate change, setting national climate policies, directing public funds towards sustainable projects, and creating regulatory environments that incentivise private sector participation. More specifically, through fiscal policies, subsidies, and direct investments, they can catalyse large-scale climate action and fast-track the low-carbon transition.
- However, climate change mitigation and adaptation require substantial financial resources. Governments might increasingly turn to financial markets to raise funding through sovereign bond issuances. This provides an opportunity for sovereign debt investors to finance the low-carbon transition and encourage governments to implement robust climate policies.
- Driven by the vision that sovereign bond markets are a resourceful, yet underexplored, arena of transition financing, ING initiated working on a novel investment solution with the ambition to mobilise capital at scale to support countries in the transition to a net-zero future. After extensive research and consultation with various stakeholders, including the Transition Pathway Initiative Centre, it started developing a sovereign climate assessment and sought out the right partners to collaborate with, ultimately joining forces with Robeco and FTSE Russell.
Points of differentiation:
Together, these three parties embarked on this journey that has been guided by four key design principles:
- Purposeful: the solution should support financing the climate transition by directing capital flows towards countries that are aligning with the Paris climate goals.
- Accurate: the solution should be based on a credible assessment of countries’ climate performance. An independent, high-quality dataset has been selected, and a robust methodology was developed to ensure outcomes reflect the true state of current and future climate impact.
- Meaningful differentiation: the differences in climate performance between countries should be substantially reflected in the portfolio, highlighting the distinct climate-related attributes of individual countries. This ensures strong performers significantly benefit from their advanced climate action relative to climate laggards, and all countries are financially incentivised to improve their performance over time.
- Investable: the investment solution must be designed to be accessible and attractive to investors, encouraging widespread adoption. This involves not only meeting climate goals but also offering an attractive risk-return profile, thereby fostering scale and driving significant capital towards strong climate performers
What does our research mean for investors?
Participating in the investment solution offers several advantages for (institutional) investors
- Alignment with Climate Goals The investment solution allows investors to align portfolios with global climate goals and support countries that are actively working on climate change mitigation and adaptation.
- Performance Potential The index favours countries that are better managing climate-related challenges, potentially leading to improved economic performance and credit ratings.
- Risk Management Investing in countries with strong climate performance can help mitigate transition risks, as these countries are more likely to have lower credit risk and borrowing costs.[1]
- Engagement Opportunities The investment solution will be used as a platform for sovereign engagement, encouraging and incentivising countries to adopt robust climate policy frameworks.
[1] https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2023.4869
