CONTRIBUTORS
Roberto Apelfeld, PhD
Paulo Caricati, CFA
Tania Labastida Garcia
Marjan Zahedi, PhD
Brishni Mukhopadhyay, CFA
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Key takeaways
- International accords such as the Paris Agreement have galvanized countries to set ambitious targets for reducing their respective carbon footprints.
- Many countries are investing in renewable energy sources to facilitate the transition away from fossil fuels and to meet the emissions reduction targets.
- Passive decarbonization strategies based on country targets are insufficient. Active rebalancing and reallocation in sovereign bond portfolios are necessary for their alignment with a net-zero pathway.
- There might be trade-offs between risk and climate goals when rebalancing sovereign bond portfolios towards a net-zero pathway.
Global efforts to contain temperature rises are increasingly focused on the decarbonization of economies—a process that includes but is not limited to transitioning away from fossil fuels and toward renewable energy sources. This shift is seen by many as critical in mitigating the impacts of climate change, as the burning of coal, oil, and gas for energy is the largest single source of greenhouse gas (GHG) emissions worldwide. International accords such as the Paris Agreement have galvanized countries to set ambitious targets for reducing their respective carbon footprints, with the goal of keeping the global temperature increase by the end of this century well below 2°C and pursuing efforts to limiting warming to 1.5°C above pre-industrial levels. To achieve such a goal, as called for in the Paris Agreement, emissions must be reduced by 45% from their 2023 levels by 2030, and reach net zero by 2050.1
In this paper, we assess the impact of countries' emissions reduction commitments on emissions reductions on sovereign bond portfolios.
Definitions:
The Bloomberg Global Treasury Total Return Index (Unhedged) tracks the total return of the fixed-rate, local currency government debt of investment grade countries, including both developed and emerging markets. The index represents the treasury sector of the Global Aggregate Index and contains issues from 37 countries denominated in 24 currencies.
Net-zero emissions or “net-zero” means cutting carbon emissions to a small amount of residual emissions that can be absorbed and durably stored by nature and other carbon dioxide removal measures, leaving zero in the atmosphere.
The Paris Agreement is an international treaty on climate change that was adopted in 2015. The treaty covers climate change mitigation, adaptation, and finance. The Paris Agreement was negotiated by 196 parties at the 2015 United Nations Climate Change Conference near Paris, France.
Endnotes
- Source: “For a livable climate: Net-zero commitments must be backed by credible action.” United Nations.
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