Toward Paris-Aligned Sovereign Investment Portfolios: Utilizing Implied Temperature Rise as a Measure of Alignment

Investors are increasingly adopting Paris-aligned strategies to better manage climate risks and opportunities. Despite sovereign debt investments making up approximately half of global bond markets, frameworks for assessing Paris-alignment for sovereign portfolios are still in their infancy. This paper firstly advocates for Implied Temperature Rise (ITR) as a metric which investors can use to assess portfolio Paris-alignment, and to capture the embedded transition risks in current sovereign holding. It then proposes a new ITR methodology, further refining existing methodologies. This methodology differs from existing methodologies in that is does not rely on benchmark emission pathways, which we believe yields less volatile and more accurate results. Furthermore, the methodology can more easily include updated global temperature data, and takes a consumption based approach to emissions. Finally, the paper provides a worked example of the methodology, utilizing a hypothetical sovereign portfolio.

Keywords: responsible investment; Paris-alignment; sovereign investments; implied temperature rise
JEL codes G12; G18; H63; Q58

Working paper no. 833