Sovereign Bonds and Climate

Investors in sovereign bonds may be increasingly focused on their investments’ potential climate impact and climate risks. Good emissions data is likely to be a building block for any detailed sovereign-bond climate analysis. In this paper, we take a look at the role that MSCI Total Portfolio Footprinting and the MSCI Sovereign Climate Value-at-Risk (Climate Var) Model can play and address some key questions around how best to quantify sovereign bonds’ financed emissions and the climate-transition risks they face.

Once investors have begun to quantify these emissions, they may also wish to think about the intensity and timing of the decarbonization programs that countries are likely to undertake. Recent economic literature and the MSCI Sovereign Climate VaR Model suggest that sovereign bonds may sell off when these programs are initiated. Investors may therefore want to consider transition risk when deciding where on a sovereign bond’s curve to take exposure.

Yield-curve shock for German sovereign debt associated with three NGFS scenarios

Data as of August 2023. Source: MSCI ESG Research