Climate policy is entering an important period of reassessment. As governments gathered in Belém, Brazil for the 2025 United Nations Climate Change conference (“COP30”), dozens of countries submitted a new round of national climate commitments, setting out emissions pathways to 2035 and beyond.
As highlighted in our London Stock Exchange Group colleagues’ COP30 Net Zero Atlas, these targets will shape national growth prospects, transition risks and the wider investment landscape. For investors, understanding the direction and credibility of sovereign transition plans is increasingly important.
Despite the central role sovereign issuers play in financing and enabling the net-zero transition, the tools available to investors to assess sovereign net-zero alignment remain limited. FTSE Russell is working to address this gap by developing a transparent, objective framework for evaluating sovereign progress.
This framework draws on the guidance of the Net Zero Investment Framework (NZIF) 2.0 from the Institutional Investors Group on Climate Change (IIGCC) and the methodological foundations established by the ASCOR[Note1] framework, developed by the London School of Economics’ Transition Pathway Initiative (TPI) Global Climate Transition Centre.
Our aim is to provide a flexible, analytically robust approach that supports multiple use cases, including index construction and reporting. The sovereign net-zero toolkit is designed to accommodate a range of investor needs while maintaining transparency and fidelity to the underlying academic and institutional research.
Understanding the NZIF 2.0 framework for sovereign alignment
NZIF 2.0 provides the most comprehensive guidance to date on how investors can incorporate sovereign bonds into net-zero investment strategies. It sets out clear criteria for evaluating a country’s alignment with long-term climate goals, organised through a four-level “staircase” system (see Figure 1).
Figure 1: NZIF 2.0 alignment criteria for sovereigns
Source: IGCC: Sovereign Bonds & Country Pathways - Target setting and implementation guidance, 2024. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
The alignment categories set out in Figure 1 reflect the progression from setting credible climate commitments to delivering sustained emissions reductions. To support consistent application, NZIF 2.0 recommends drawing on independent data sources, including the ASCOR framework, amongst others.
Our approach to assessing sovereign net-zero progress
FTSE Russell’s approach to sovereign net-zero assessment is designed to make NZIF 2.0 actionable for both index construction and portfolio reporting. Our framework is built around two core objectives:
- Creating an alignment factor that can be integrated into index methodologies to help investors allocate more or less capital based on sovereign progress towards net zero.
- Avoiding abrupt shifts in portfolio weights that might arise from the step-change structure of NZIF 2.0’s four alignment levels.
To meet these objectives, we developed an alignment factor that increases gradually as countries meet a growing share of the ASCOR indicators recommended by the IIGCC. This design rewards overall progress—such as policy development, emissions targets and institutional readiness—without requiring countries to move strictly in lockstep through the NZIF "staircase".
The factor is constructed by summing all indicators for which a country meets the criterion (“yes” answers) and dividing this by the total number of relevant indicators. We apply 23 out of the 25 ASCOR framework indicators recommended by the IIGCC (the remaining two have been excluded due to licensing constraints).
Where values are missing, when a country is exempted or where a given indicator is not relevant, these won’t be taken into account in the calculation of the factor. For example, Mexico is exempted from 5 indicators out of the 23 used, making 18 indicators relevant to its assessment.
Translating the assessment into NZIF-aligned reporting
While the progressive factor supports index design and allocation decisions, the same underlying assessment can also be mapped back to NZIF 2.0’s four alignment categories for reporting purposes. To do this, we:
- Use country-cohort averages for each NZIF criterion based on the percentage of “yes” answers, to establish transparent thresholds for countries to meet alignment categories.
- Assign each sovereign to one of the NZIF categories—Committed, Aligning, Aligned or Achieving—based on whether it meets the criteria associated with that stage.
Both the NZIF alignment factor and alignment assessment incorporate the United Nations Framework Convention on Climate Change principle of differentiated responsibilities and capacities, recognising that countries at different stages of development may face varying constraints.
Supporting net-zero aligned sovereign investing
FTSE Russell’s sovereign net-zero offerings are designed to translate NZIF 2.0 guidance into tools that investors can apply in practice. By grounding our assessment in the ASCOR framework’s objective indicators and building both a continuous alignment factor and an NZIF-consistent reporting view, we aim to support the full spectrum of investor needs - from index design and portfolio construction to stewardship and regulatory reporting. The result is a flexible framework that remains consistent with NZIF 2.0 while accommodating the diversity of approaches required across global fixed income portfolios.
Coupling this framework with forward-looking metrics—such as the Nationally Determined Contributions (NDC) Implied Temperature Rise (ITR)—lays the foundation for the forthcoming FTSE Net Zero Ambition Government Bond Index Series. This innovative approach integrates climate commitments into sovereign fixed income, enabling investors to align portfolios with global net-zero objectives and support the achievement of the Paris Agreement goals.
We continue to advance this work and welcome engagement from investors, asset owners and index users. If you would like to learn more about the framework or explore potential index applications, please get in touch with our team.
Sources
[1] Assessing Sovereign Climate-related Opportunities and Risks: for more details, please see 2025-ascor-framework-methodology-note.pdf. | Back to Note 1
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