Engaging with sovereign issuers: Developed Market investors can learn from Emerging Markets
When it comes to engaging with sovereigns on climate change, developed market investors can learn a thing or two from emerging markets, argues Claire Meier Underhill, investor director at ASCOR
Some blanket statements are true: All countries could be doing better in how they address the climate crisis, and all investors should be doing better on how they engage with countries on climate performance.
The challenges lie in 1) whether investors feel they have a mandate and capability to speak with sovereign issuers and 2) whether they have the data for meaningful analysis and engagement.
When it comes to the first challenge —engaging with sovereign issuers —developed market sovereign bond investors and others just need to take a page out of the Emerging Markets Sovereign Debt handbook.
Emerging market sovereign debt investors have always engaged with debt management offices and various ministries on a range of fiscal and funding issues. They are starting to use lessons learnt in those collaborative interactions to discuss and work towards best practices in the climate space as well.
These emerging market investors understand that climate issues mean failed or thriving harvests, preventing or mitigating natural disasters; it can mean peace or war, default and downgrade . Emerging market sovereign analysts and portfolio managers have been thinking about climate change and sovereign credit worthiness for as long as they’ve been investing.
Recent research from the European Central Bank[1] and a research paper by the University of East Anglia, which counted veteran sovereign credit analyst Mortiz Kramer amongst its authors, suggest that current sovereign credit ratings are missing valuable input into sovereign ratings due to the absence of explicit climate considerations.
While now there is generally more fiscal space for developed markets to absorb the negative aspects of climate change, this is not a given for much longer than the short term. Sovereign bond investors across the rating spectrum have the mandate and actual fiduciary requirement to engage with sovereigns on climate change.
Now to address investors' capacity to engage on climate change with sovereigns…This gets trickier for developed markets. While the developed sovereign bond market is much larger and almost all multi-asset investors have sovereign exposure, there isn’t a cohesive group of investors similar to the emerging market sovereign bond asset class. EM sovereign debt only accounts for roughly 4% of total sovereign debt issuance [3] globally, but it is a high-touch asset class. Investors and issuers have multiple touchpoints and frequent interactions. This lends itself to constant dialogue and successful engagement.
The lack of those attributes in developed market sovereign investing hinders the traditional model of engagement. Additionally, sovereign engagement gets pushed off track by the assumption that investors need to be sovereign bondholders to have a successful engagement.
Sovereign engagement on climate with developed markets can be successful by utilising the concept of the universal investor. Corporations operate in the ecosystem that the sovereign develops and maintains. Corporate investors are just as critical in conversations with sovereign issuers as are sovereign bondholders. In big, diluted developed sovereign bond markets, engagement from all investors, corporate or sovereign, is critical.
Here is another blanket statement: For climate and sovereigns, we are all interested parties.
The second challenge, gaining access to meaningful data on a sovereign’s current situation and its trajectory, is covered by ASCOR.
ASCOR (Assessing Sovereign Climate Opportunities and Risks) is the first tool created for the investment community by the investment community that provides independent and academically rigorous information to help investors assess how sovereigns are managing climate risks and opportunities. It is now quickly approaching its third review of countries and has expanded from its initial 2023 start of 25 to 85 countries.
ASCOR now covers 90% of global greenhouse gas emissions, 92% of global GDP (in current international US$, adjusted for purchasing power parity), and 100% of four key global government bond indices. And ASCOR will continue to grow until it covers as much of the sovereign investable universe as possible.
The ASCOR framework has been developed and iterated according to the following seven design principles:
- Indicators are assessable using publicly available data, such as government documents and reliable, publicly available databases.
- Indicators are objectively assessable using a transparent methodology.
- Indicators are clear, useful and accessible to investors, including those with limited resources to assess climate change.
- Indicators are chosen to avoid unnecessarily adding to the reporting burden of sovereigns.
- Indicators are pitched at the national level, so metrics of climate opportunities and risks are relevant for sovereign bond investment decisions and country analysis.
- The framework was developed in line with the principle of common but differentiated responsibilities and respective capabilities which is enshrined in the UN Framework Convention on Climate Change (UNFCCC).
- The framework focuses on sovereign management of climate risks and opportunities through the policies and objectives that countries can put in place.
ASCOR aims to inform, support and facilitate investment decision-making, especially by sovereign bondholders, and enable a more explicit consideration of climate change at the national level. However, it can be used by all investors and stakeholders to discuss and support improvements with sovereigns on climate challenges.
Emerging Markets sovereign bond investors show investors how to engage with sovereigns, the link between climate and credit risk demonstrates the fiduciary impetus to engage, and ASCOR makes it possible to bring transparent and academically rigorous analysis to the table.
Final blanket statement: Investors need to engage with sovereigns on climate. The clock is ticking for both planet and portfolio.
[1] [1] https://www.ecb.europa.eu/press/research-publications/resbull/2025/html/ecb.rb250730~ebfb33d43c.en.pdf
[2] https://research-portal.uea.ac...
