Sovereigns at Risk
Countries must move faster on mitigation and adaptation plans to mobilise public and private finance, says Antonina Scheer, Policy Fellow and Research Project Manager at the TPI Centre.
The headline statistics from the Assessing Sovereign Climate-related Risks and Opportunities (ASCOR) project’s ‘State of Transition in Sovereigns 2024’ report should serve as a wake-up call for governments, investors and financial institutions worldwide.
According to its analysis, no country has a 2030 nationally determined contribution (NDC) target ambitious enough to align with their 1.5ºC benchmark to meet the Paris Agreement goals.
In addition, eight out of 10 of wealthy countries are failing to contribute to their proportional share of the (recently tripled) US$100 billion international climate finance goal, or to set future finance targets that would meet such a share. Only 16% of countries have a transparent and credible commitment to phase out fossil fuel subsidies. Further, just a third of developing countries have been transparent about the costs of essential climate mitigation and adaptation, which may constrain the raising and deployment of public and private finance.
The investor-led ASCOR project has expanded its universe from the initial 25 pilot countries to assess the climate policies and ambitions of 70 countries, which represent 85% of global greenhouse gas emissions and 90% of global GDP. These countries are also the most relevant for investors to incorporate climate change considerations into their sovereign bond evaluations, covering 75–100% of the major sovereign bond market indices.
Seeking to help investors better understand the climate risks in their sovereign debt portfolios, the tool assess countries’ performance across three pillars: emissions pathways, climate policies and climate finance.
Antonina Scheer, Policy Fellow and Research Project Manager at the Transition Pathway Initiative Centre (TPI Centre), the academic partner of the ASCOR project, highlighted a few sources of optimism beyond the grim headline figures, including the fact that 40 out of 70 countries have reduced their emissions over the past five years.
“Importantly, there are several areas where climate policy is becoming mainstream across all income groups, not just high-income countries,” she told ESG Investor.
The study’s indicators progress in ambition for each pillar area, she explained. For instance, the first indicator for carbon pricing – under the climate policy pillar – determines whether a mechanism is in place, the second establishes whether the mechanism is covering enough of emissions and the third looks at whether it is a high enough carbon price. “Most of the countries we assessed have that foundational step in place,” Scheer said.
For example, a majority of countries (69%) have a carbon pricing system, 57% have a climate framework law, and 67% have some form of transparency around climate spending. “While not all are deploying the most sophisticated climate budget tagging methodology, it’s the first step in creating transparency in budget disclosures,” she added.
Similarly, most countries (76%) have published a national adaptation plan (NAP) and 60% regularly publish national climate risk assessments. “It’s a good sign that this is becoming mainstreamed, but countries need to accelerate their efforts and be much more ambitious,” said the research project manager.
The report also analyses the relationship between performance against the ASCOR framework and country characteristics such as region, income and fossil fuel dependence. It does this by synthesising the 72 ASCOR indicators and metrics into two pillar-level scores: emissions pathways; and climate policies and finance.
Austria and Colombia are among the few countries that receive leading scores in their respective income groups for both pillars.
“While it’s important to assess the pillar results separately, as they look at different things and can diverge widely in some countries, Colombia and Austria exhibit strong performances by placing in the top quartile in both areas,” she said.
Sharing best practice
The report also proposes lessons from existing performance for national transition planning, making three top-level recommendations. This is indicative of how ASCOR is looking to advance its analysis, according to Scheer.
The first suggestion is to adopt a whole-of-government vision to coordinate ministries. “The whole-of-government approach is a useful concept, but there’s not much clarity around what that might look like,” Scheer said. “As we demonstrated in the section on synthesis of national climate action, climate framework laws are a useful foundation for that type of government vision.”
In addition, some climate legislation has special provisions or bodies that are designed to coordinate interministerial agendas. The report cites Colombia’s Comité de Gestión Financiera and Nigeria’s National Council on Climate Change.
“We have highlighted clear examples that countries can take forward and learn from each other, which might be useful to policymakers,” she said.
Scheer also remarked on the way the ASCOR research dovetails with ongoing work at the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science under the Centre for Economic Transition Expertise (CETEx).
“CETEx has also been working with governments to develop guidance on good national transition planning, and we are able to contribute to that conversation with ASCOR’s results,” Scheer said.
The report’s second recommendation is to translate national ambitions to the sectoral level. “Alongside other organisations, we agree that this would be a useful way to make NDCs more credible and achievable. As such, we highlighted examples of countries that have developed whole sectoral strategies, including Chile, Costa Rica and New Zealand,” she said.
Providing granularity is crucial for investors to understand how a country’s NDC will turn into specific regulations and particular business operations that they might be investing in, according to Scheer.
The third recommendation is to develop climate-related investment plans, clarify funding needs and identify sources of finance. “Countries need to provide more transparency around what funding they have secured and how much more is needed,” she said. “Country platforms, for example, are one way to organise that process.”
Currently, ASCOR only assesses whether developing countries have published a transparent costing of their NDCs and NAPs. “There’s a clear understanding that international finance will need to flow in that direction, and in some ways it’s complementary to the way we assess developed countries’ contributions to international climate finance,” explained Scheer.
However, investors have indicated that they also want to see developed countries disclose costing information. “We might expand the tool in future to look for disclosure across the board, as such analysis can help in any country context because it provides clarity to investors,” she said.
Other forms of spending should also be identified more clearly in investment plans, according to Scheer. “Tagging which elements of the budget are going towards climate mitigation or adaptation, as well as fossil fuel subsidy phase-out, should be part of investment plans and disclosure. This will help to make a coherent case of how governments are planning to finance the transition and not misuse funds for activities that are counter to the transition,” the research project manager argued.
Mobilising finance
Bringing together public and private finance in support of climate mitigation and adaptation was the main point of discussion at COP29 in Baku, labelled ‘Finance COP’.
To properly digest the final declaration from COP29 will take some time, and Scheer expects weeks of re-analysis to clarify exactly what was stated and the way it will be interpreted by the countries that need to implement it.
The previous target was to mobilise US$100 billion per year for developing countries, which ASCOR assessed in the current report and will use as a benchmark until 2025, according to Scheer. That was replaced by a US$300 billion per year commitment from private and public sources in Baku, which was considered much too low by developing countries, alongside a proposal to reach US$1.3 trillion per year.
“The US$1.3 trillion is framed as an appeal to all actors, but developed countries have not taken responsibility for that goal in the same way that they have for the US$300 billion. The way the number is framed means it has very low accountability,” she said.
Scheer believes that private investors should look at the US$1.3 trillion appeal as similar to the way both limiting climate change to 1.5ºC and achieving net zero emissions by 2050 became a call to action to the private sector, regardless of the exact way it was framed in negotiations.
“The world has called for this and we need to set strategies to mobilise financing,” she said. “In addition, we need to rethink exactly what these financial flows are. Not all can be investments that expect a return; instead much of it needs to be concessional, from other governments, multilateral development institutions, etc.”
Industry collaboration
Evidence of the climate and nature challenges for governments worldwide is mounting. For example, environmental fintech firm Iceberg Data Labs (IDL) recently released a new dataset examining the impact of more than 120 sovereign nations on climate change and biodiversity loss worldwide. Its methodology places emphasis on assessing the often-overlooked Scope 3 impacts on both climate and biodiversity.
Collaboration with different industry players is top of mind for Scheer. “The ASCOR tool is open source, which means that the data is accessible to anyone, produced academically, independently, and involves fully transparent methodologies. From that position, we are open to other companies, NGOs and analytical groups to draw on our work,” she explained. “But as ASCOR is open source and doesn’t charge for data usage, we can only use data sources that have a similar approach.”
Several data partners are involved in the ASCOR tool, such as Climate Resource, which is the source of its PRIMAP emissions data, and Climate Analytics, which is the source for its 1.5°C benchmarks. “We try to draw on what exists already and not duplicate where it’s not necessary,” she said.
The ASCOR tool will continue to develop over time, as the policy landscape and investor needs evolve, according to Scheer. “We will also look at complementary solutions, with an eye to perhaps absorb them, work with them or signpost them to keep our community up to date,” she added.
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