Sovereign issuers in the spotlight: nations falling short of 1.5°C goals TPI warns
Sovereign bond issuers are making progress on emissions but remain off-track to meet 1.5°C targets, posing challenges for fixed income investors
Countries have made significant progress in reducing emissions but are falling short of aligning with the 1.5°C Paris Agreement target, according to a landmark report highlighting the challenges in decarbonising fixed income portfolios
The report, published by the Transition Pathway Initiative Centre (TPI Centre) in collaboration with a broad range of asset managers and owners, evaluates the world’s most powerful sovereign bond issuers on their transition capabilities.
Covering 70 high-, middle-, and low-income countries that collectively account for more than 85% of global greenhouse gas (GHG) emissions and between 75% and 100% of major sovereign bond market indices, the report provides key insights into how these major bond issuers are transitioning.
The findings are particularly important for institutional investors with net zero targets in place as sovereign debt represents a significant share of their portfolios, especially for closed defined benefit (DB) schemes and insurance investors.
Having made substantial progress in decarbonising their equity holdings through divestments and climate-tilted indices, investors now face the complex task of reducing the carbon footprint of their fixed income assets.
For EU and UK insurers, the challenge is compounded by Solvency II regulations, which require investments in highly liquid assets, making divestment from sovereign debt an impractical option.
The report highlights some progress in transition pathways, with 40 of the 70 countries assessed having reduced emissions over the past five years. Nearly all have set medium-term targets.
However, it reveals a stark reality: not a single country’s historical emissions trend or 2030 target aligns with its national 1.5°C benchmark. Only a few nations meet their ‘1.5°C fair share’ targets—an allocation based on equity principles—in either emissions trends or 2030 objectives.
While over half of the surveyed countries have made progress by establishing climate frameworks in law, many fall short in phasing out fossil fuel subsidies and production.
High-income countries generally score well on climate policies, but those economically reliant on fossil fuels—such as Azerbaijan, Qatar, and Saudi Arabia—tend to perform the worst.
The report also underscores a critical shortfall in international climate finance. More than 80% of developed countries assessed fail to contribute or commit to their proportional share of the $100bn international climate finance goal set at the COP summit in Paris. This raises concerns about the feasibility of achieving the $300bn climate finance target agreed in Azerbaijan earlier this week.
The authors of the report are TPI's Antonina Scheer, Camila Cristancho-Duarte, Simon Dietz, Setenay Hizliok, Johannes Honneth, Sylvan Lutz, Giorgia Monsignori and Carmen Nuzzo of the TPI Centre, and Chronos Sustainability's Rory Sullivan.
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