Sovereign Risks

Objective:

Climate risk analysis plays an important role in indicating whole economies' exposure to extreme loss of capital due to climate change. South Pole's analysis supports investors to identify and measure the risks to their invested capital by incorporating countries' climate-related risks and opportunities into their sovereign bond and broader investment strategies.

Our approach

South Pole develops risk indicators for investors to measure their climate-related risks today and into the future. South Pole's Sovereign Climate Change Risk Model indicates risks related to climate change and assesses a country's preparedness for a 2-degree low carbon economy.

Our approach allow investors to assess a country's ability to pay back its debt under different climate change scenarios. By assigning relative climate risk scores to sovereign bonds, our assessment addresses risk indicators such as

  • Country Preparedness: How well prepared is a country in its economy and governance for a two-degree economy?
  • Vulnerability: How vulnerable is a country to the impact of climate change?
  • Fossil Fuel Dependence: How dependent is a country on fossil fuel reserves?
  • Low-carbon Solvency: How does a low-carbon scenario impact a country's ability to pay back its sovereign debt?

South Pole's Climate Change Sovereign Risk Model

Risk categories and indicators

Category Indicator
Emission Performance Average emission intensity change
Volatility in emission intensity change
Nominal emission intensity
Environmental Performance Index (EPI) score
Institutional Performance Policy initiatives / laws in place to address climate change
NDC Alignment with 2°C future
Credibility of climate change pledges
Climate Change Policy Performance Index (CCPI) score
Government Performance Renewable R&D budget as part of total energy spending
Total subsidy (% of GDP) on fossils and electricity
Portion of energy consumption from renewable sources
Global Green Economy Index (GGEI) score
Liability to Risk Performance Disaster Losses as % of GDP
Income from environmental taxes (% of GDP)
Global Climate Risk Index
Status of adaptation framework

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