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Sovereign Bonds

Below is NZIF 2.0 implementation guidance for sovereign bonds. For approaches to achieving the asset level targets and more detailed guidance, please click on the NZIF 2.0 guide below.

Alignment targets
  • Asset alignment target: Set a 5-year target for increasing the % of sovereign bonds allocation to issuers that are categorised as ‘aligned’ to a net zero pathway, or ‘achieving’ net zero.
  • Engagement threshold target: A threshold of financed emissions from sovereign bonds in a portfolio and undertake engagement actions with the relevant countries and territories.
Scope
  • Include sovereign bonds of all maturities issued in domestic or foreign currencies.
  • All sovereign issuance from national governments is considered in scope, including holdings required for liability matching, regulatory purposes, and cash management. However, inevitable restrictions likely exist that will affect the practical extent these assets can be aligned. Any restrictions should be disclosed.
  • Sub-sovereigns, municipal or state authorities and supra-nationals that issue bonds are not explicitly covered, although investors may apply similar concepts on a best effort basis. As data availability improves, these will be considered in future workstreams. However, labelled and climate-related instruments issued by these entities may be considered under the climate solutions objective.
  • Where the issuer is a publicly (majority) owned company (i.e., state-owned enterprises), investors should follow the guidance for corporate fixed income and include it in targets associated with this asset class.
  • It is acknowledged that investors face limitations specific to this asset class, some of which they do not have full agency to address. Consequently, a singular performance expectation is not considered possible. However, investors are invited to use all the levers they have at their disposal to achieve their maximum contribution towards real-economy decarbonisation and transparently disclose where limitations apply.
Criteria underpinning alignment assessment
Key
  • Green ticks represent when a criterion is required to be fulfilled for a particular alignment category to be obtained.
Criteria
Committed to aligning
Aligning to a net zero pathway
Aligned to a net zero pathway
Achieving net zero

Budget / capital / allocation alignment: A clear demonstration that the budgeting actions of the country are consistent with global net zero goals (e.g. climate budget tagging, where an ambitious share of the budget is green).

Emissions performance: Current absolute GHG emissions trend is at least equal to a relevant net zero pathway, or converging in a manner that is satisfactory.

Decarbonisation plan: A robust quantified plan setting out the measures that will be deployed to deliver GHG targets (LT-LEDS), and how the sovereign is enacting the policies necessary to deliver against its NDCs.

Disclosure: Comprehensive and timely disclosure of emissions (e.g. data quality, historical data, LULUCF, etc).

Targets: Short and medium term emissions reduction targets aligned with global net zero goals. These are set at the production emissions level (scope 1) and should be consistent with the Paris Agreement (NDCs).

Ambition: A long term goal consistent with the global goal of achieving net zero by 2050, as well as interim goals and targets that are coherent with it (NDCs absolute emissions targets).

*Additional alignment criteria that a sovereign within a high impact material sector needs to meet.

Useful resources

Explore further IIGCC resources which offer additional guidance or information which is complimentary to the use of NZIF.