Collaborative Sovereign Engagement on Climate Change

The initiative’s aim is for investors to work collaboratively to support governments to take all possible steps to mitigate climate change, in line with investors’ fiduciary duty to mitigate financial risk and maximise long-term value of assets. This includes supporting countries to hold the increase in global average temperature to well below 2°C above pre-industrial levels and pursue efforts to limit this to 1.5°C, consistent with their commitments to the Paris Agreement .

Since July 2022, the initiative has undergone a pilot phase focussed on the Australian system. In June 2024, the PRI published the first progress report  on the pilot, summarising key successes, challenges and learnings, and the positive feedback from participants on its activities to date. Recognising the value that participating investors reported that they had gained from the initiative, and positive results of the pilot more broadly, the report also sets out the future direction of the initiative to continue engaging in the Australian system and to assess the potential for expanding to further markets.

For more information on the initiative or to join the waiting list, please contact [email protected]. Signatories registered on the waiting list are offered opportunities to express interest in joining the initiative as soon as opportunities arise.

Why is this collaborative engagement needed?

Climate change issues are a material threat and generational opportunity for investor portfolios. Through sovereign engagement, global investors seek to reduce risk associated with worsening global heating and maximise the opportunities arising from the transition to a net-zero global economy, including where related to:

• The value of sovereign debt investments;
• The continued competitiveness of national economies and investee companies; and
• Systemic risks and opportunities through exposure to the global economy.

Importantly, it is consistent with investors’ fiduciary duty to address climate-related risks and opportunities by supporting governments in meeting the commitments to the Paris Agreement objectives and ensuring a just and orderly transition to net zero. This is recognised by the growing number of investors that now explicitly factor in sovereign climate performance to their investment decisions.

Additionally, at an estimated US$60 trillion, sovereign debt accounts for a large share of global assets under management. It is essential that investors address climate risks associated with this asset class to achieve their net zero commitments.

Creating opportunities for dialogue between governments and investors enables sovereigns to articulate their approach to managing sustainability risks, investors to voice support for action, and both sides to gain a deeper and more common understanding of related risks and opportunities. This allows governments to more effectively create enabling economic environments for private finance through better informed decision-making on public expenditure, policy and regulation. In turn, such dialogue supports governments to accelerate their transition to net zero by crowding in private sector investment.

Through collaboration and co-ordination, the initiative also aims to unify and amplify the messaging of global investor sovereign engagement.

Engagement aims

Through mutually beneficial engagement, investors are seeking that sovereigns:

• Close the gap between current action and a Paris-aligned emissions reduction trajectory;
• Establish a detailed, credible and economy-wide net zero transition plan with supporting policy mechanisms, budget expenditure and investment structures;
• Build greater climate adaptation and resilience across the economy and community to avoid worsening disruption and damage from physical risks; and
• Improve disclosure of sovereign exposure to climate risks and opportunities consistent with international standards.

The Australian Pilot

Upon the launch of the pilot, investors participating in the initiative identified major sovereign bond issuers as an area where collaborative engagement could add the greatest immediate impact. This is due to the significant risks that investors are faced with in this asset class, and limited existing opportunities for individual investor engagement.

As Australia has traditionally performed poorly against peer nations on climate and environmental measures in sovereign risk ratings, participating investors took the opportunity to support climate policy action at a critical juncture in Australia following the introduction of the 2022 Climate Change Act and other major reforms.

As part of this pilot 25 international investors, collectively responsible for $8 trillion in assets under management, have been engaging with sovereign entities in the Australian system. Participating investors are named in the table below.

Achmea	Brown Advisory	HESTA	Morgan Stanley Investment Management	QIC
Ardea Investment Management	Candriam	IFM Investors	Munich Re	Rest
Aviva Investors	Colchester Global Investors	Insight Investment	Neuberger Berman	Robeco
BNP Paribas Asset Management	Fidelity International	Jupiter Asset Management	Nordea Asset Management	Schroders
Brandywine Global Investment Management	First Sentier Investors	LGPS Central	Pendal Group	Sumitomo Mitsui Trust Asset Management

Positive feedback from participating investors and results from the pilot against its objectives more broadly means engagement will continue with Australian governments, whilst the potential expansion of the initiative to further markets is assessed.

More information on the progress of the Australian pilot and considerations for its future development is available in the most recent progress report, published in June 2024.

Investor Working Group

An Investor Working Group leads the initiative’s engagement activities, made up of participating investors from across the world.

Each investor engages through the initiative as a member of one of three thematic sub-groups focused on different parts of sovereign systems:

• National governments
• National regulators and authorities
• Sub-sovereigns

Further information can be found in the Investor Working Group Terms of Reference. The Investor Working Group is not currently open to new participants, but signatories may join the waiting list to be invited to express their interest in joining as opportunities arise in future.

Advisory Committee Members

Name	Organisation
Thomas Dillon	Aviva Investors
Malika Takhtayeva	BNP Paribas Asset Management
Reina Berlien	Brandywine Global Investment Management, LLC
Akaash Sachdeva	HESTA
Peter van der Werf	Robeco
Richard Proudlove (Observer)	IGCC