Sovereign Bonds
PCAF Accounting and Emmergin Market Bonds
The new PCAF standard for sovereign debt is a practical tool which allows to abide by reporting standrds, improve our environmental risk exposure to emissions related actvity and improve out impact strategy when investing in government bonds. The PCAF accounting methodology measures sovereign emissions by distinguishing production and consumtopion related emissions which themselves consist of 4 sub-sections: export emissions, domestic emissions(scope1), emissions from energy imports(scope 2), emissions from non-energy imports(scope 3). By aligning these measures with sovereign debt and GDP PPP we can measure the financed emissions that would be associated with an bond investment in a sovereign security.
To guide our decision, PCAF Financed emissions pushes us to focus production emission and select the sovereign bond with a high consumption to production ratio. However, it also suggest to maintiain a holistic approach and observe consumption emissions data as well. Indeed, given the formulation from macroecnomic theory, usually government psening leads to consumption ihtin the country. Looking at comsuption emissions equally would therefore enhance our investment rational and give a more holitistic view not only of our exposure but also our expected impact.The reason for this logic is that more than using the PCAF model to measure our exposure we could aslo use the same data to support govenrment investements in countries that would demonstrate signs of good ESG performance.
When ploting Financed Consumptoion Emissions over Financed Production Emissions we can observe that these values will not be the same as a country’s production and consumption would vary depending on ther trade flows, consumption paterns and the supply chain origin of their consuummed goods.The PCAF formula for financed emissions is measured as : finnced production emissions = attributed emissions * country production emissions, with atrributed emissions being the value of expected bon investment divided by the country’s GDP times Scope 1. The PCAF strategy that is only consercenred about exposure would would therefore suggest to select the bond return within the pool of bonds with the lowest Financed Production Emission value. However, a country with a low produced financed emissions could also have a high financed consumption emissions. Even if our exposure is reduced, our impact in the future could increase emissions if consumption patterns aren’t being directed towards lesser emissions intensive goods. It is therefore interesting in comparing financed emissions in produciton relative to consumption to see how countries perform.
# A tibble: 24 × 26
# Groups: Region [2]
code year ...1 country pop GDP_PPP Curre…¹ scope3 scope1 expor…² scope2
<chr> <dbl> <dbl> <chr> <dbl> <dbl> <dbl> <dbl> <dbl> <dbl> <dbl>
1 MEX 1995 817 Mexico 9.00e7 7.78e8 3.60e8 59.8 518. 65.6 0.242
2 MEX 1997 819 Mexico 9.32e7 9.19e8 5.00e8 84.9 572. 75.7 0.414
3 MEX 1999 821 Mexico 9.63e7 1.02e9 6.00e8 116. 591. 87.5 0.348
4 MEX 2001 823 Mexico 9.94e7 1.12e9 7.57e8 145. 621. 97.5 0.35
5 MEX 2003 825 Mexico 1.02e8 1.18e9 7.29e8 132. 657. 111. 0.363
6 MEX 2005 827 Mexico 1.05e8 1.34e9 8.77e8 162. 693. 128. 0.467
7 MEX 2007 829 Mexico 1.08e8 1.56e9 1.05e9 177. 730. 140. 0.659
8 MEX 2009 831 Mexico 1.11e8 1.64e9 9.00e8 143. 733. 134. 0.574
9 MEX 2011 833 Mexico 1.14e8 1.91e9 1.18e9 189. 762. 165. 0.802
10 MEX 2013 835 Mexico 1.17e8 2.06e9 1.27e9 192. 772. 185. 0.891
# … with 14 more rows, 15 more variables: LULUCF <dbl>, cons_emissions <dbl>,
# cons_lulu <dbl>, prod_emissions <dbl>, prod_lulu <dbl>, Region <chr>,
# IncomeGroup <chr>, debt <chr>, debt_percent <chr>, cons_prod_ratio <dbl>,
# att_emis <dbl>, prod_fin_emis <dbl>, cons_fin_emis <dbl>, prod_inten <dbl>,
# cons_inten <dbl>, and abbreviated variable names ¹CurrentGDP,
# ²export_emissions
In our graph we can see that all the country’s above the live high a higher consumption to production financed ration that those below the live, meaning that they are consumption intensive couyntries. Therefore, in the first step of our analsys we will select two countries from different income group that have a lower consumption emissions intensity relative to their production, Mexico and Tunisia.
Looking specifically at their consumption intensity their time this graphs confirms that this strategy shows a decrease in consumtption intensity through time which is in lign with the initial rational of our investment as we are looking to minimise future impact. Additionally when looking at the prodction intensity through time, despite having a relative financed emission value relative to its consumption, the production inensity has been dropping drasticaly througout the same period. This could be attributed high GDP increases however when looking at GDP growth over time this isn’t the case. We could therefore assume that the improvements in their production emissions are associated with greener processes.
Therefore even if these countries have a higher production emissions relative to their consumption, their intensity has been decreasing at a much mre rapid rate than consumption. Just as PCAF suggested looking just at one ration or emissiosn source isn’t enough and we should establish multuiple methods to clarify the investment descision in fixed income securities when evaluatin ESG performance.
To conclude, the PCAF acounting model is helpful in analysing the exposure of our investment in sovereign bonds but because PCAF also suggest a holistic approach it could laso be a tool to measure our expected potential impact. However, given teh availability and the reliabulity of the miesisons data dfor most emmerging markets this could be difficult. We also need to consider other data sources that could help us deteermine what is the soveriegn curent and future invetsment strategy. Looking at Parliament budget could be a useful took to determine a government’s intended plan to mitigate and adress emissions.