How to build a climate-adjusted government bond index

Climate change is a substantial challenge, which is expected to have a significant impact on global economies, both in terms of its physical effects and mitigating efforts.

There exist multiple, distinct design and methodological challenges associated with incorporating climate risks into government bond indexes.

To date, investors have focused mostly on climate risk at the corporate or asset level (particularly listed equities). Consequently, government bond investors risk overlooking the impact of climate change on their portfolios.

As climate risks accelerate, they are increasingly gaining attention from government bond investors, However, there remains a lack of climate based investment products in fixed income, particularly in sovereigns.

In this FTSE Russell paper, we introduce the climate methodology that underpins the FTSE Advanced Climate World Government Bond Index (Advanced Climate WGBI) in detail, emphasizing the rationale behind each climate pillar (transitions risk, physical risk, and resilience) and also qualifying the chosen calibration.

To read the full research paper click here.

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