Sovereign assets and sustainable and responsible investment: the importance of climate metrics
Series: Occasional Papers. 2512.
Author: Fernando Arranz Gozalo, Clara I. González Martínez and Mercedes de Luis López
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Abstract
Climate change presents challenges to global growth and financial stability, and has an impact on asset returns. An increasing number of investors are incorporating sustainable and responsible investment criteria into their portfolio management and active ownership practices. Accordingly, different climate metrics need to be developed and applied to identify and manage exposure to climate-related financial risks. This paper seeks to provide greater clarity on different climate metrics, particularly for their application to portfolios with sovereign assets, given the lack of harmonisation in this asset class. There is ongoing debate about the variables to use and the normalisation of greenhouse gas emissions. This paper proposes specific metrics for sovereign assets that characterise the transition risk associated with investments and are also suitable for the disclosure of such information. Additionally, the paper evaluates their practical application in theoretical portfolios and analyses the advantages and limitations of each metric. It concludes by identifying future challenges − such as data availability, the harmonisation for mixed-asset portfolios − and emphasises the importance of developing forward-looking methodologies to assess long-term climate goals.