FTSE Russell has launched the FTSE Climate Risk-Adjusted European Monetary Union (EMU) Government Bond Index providing exposure to European sovereign bonds while tilting country weights towards those considered more resilient to climate risks.

The index provides exposure to sovereign bonds from European Monetary Union countries while tilting weights towards those perceived to be more resilient to climate risks.
According to FTSE Russell, the index is suitable for use as a benchmark for performance measurement or as an underlying for index-linked investment funds, including segregated mandates and ETFs.
The index is based upon the parent FTSE European Government Bond Index (EGBI) which consists of investment-grade sovereign bonds from European Monetary Union (EMU) countries that satisfy criteria for market size and barriers to entry.
Eligible countries currently include Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, and Spain. Eligible bonds must have a minimum issue size of €2.5 billion.
The new climate risk-adjusted index incorporates a forward-looking assessment of sovereign climate risks using analysis from LSEG-owned ESG analytics firm Beyond Ratings.
Each country is assessed by three core climate risk pillars: transition risk, physical risk, and resilience.
Transition risk represents the impact on the country and its economy from the required efforts to meet the Paris Accord 2.0°Celsius target, measured on 15 variables including GDP per capita, the energy intensity of GDP, and carbon intensity of energy production.
Physical risk refers to the climate-related risk to the country and its economy from the physical effects of climate change including sea-level rise, exposure of the economy to potential agricultural damages, and climate-related natural disasters such as extreme weather.
Lastly, resilience indicates a country’s preparedness and actions to cope with climate change, measured based on the strength of national institutions, and the level of social and economic development.
Countries are scored across each of the pillars and a single combined score is derived for each country. Country scores are then used to reweight the country’s exposure in the index to provide higher exposures to countries that are better prepared for climate change risks. Similarly, the methodology lowers exposure to countries that are more threatened by climate change risks.
Country climate scores are calculated annually in May with the index also maintaining the standard rebalancing processes of the EGBI.
According to FTSE Russell, the methodology results in reduced climate risk by 16% and greenhouse gas emissions by 7% compared to the market-value-weighted EGBI over a back-tested period from 2001.
The countries that have experienced the largest reduction in weight compared to the EGBI are Germany (-5.3%), the Netherlands (-3.2%), Spain (-1.3%), and Ireland (-1.0%). France is the primary beneficiary with an increase in weight of 8.9%, followed by Finland (+1.3%), and Austria (+0.8%).
This is the second climate risk-adjusted index from FTSE Russell following the introduction of the FTSE Climate Risk-Adjusted World Government Bond Index in July 2019. This index, which is based upon the parent FTSE World Government Bond Index (WGBI), provides exposure to developed market sovereign bonds globally while also adjusting country weights by resilience to climate change risk.
Sylvain Chateau, Co-Founder and COO, Beyond Ratings, commented, “There is increasing awareness of how sovereign states are uniquely exposed to the risks of climate change. This has in part, driven client demand for climate risk-adjusted fixed income indexes since the launch of Climate WGBI, particularly from European investors. With this launch, the Climate EGBI now offers European sovereign debt investors an efficient means to quantitatively assess and reduce climate risk and GHG emissions in their portfolios.”