Index and data provider FTSE Russell has launched a climate risk-adjusted government bond index for the inflation-linked market.
The group said the market cap for inflation-linked securities across the world has grown to $4trn, an increase of $1.2trn over two years. It also noted that market expectations for a global economic recovery from Covid-19 may drive inflationary pressures in the near term.
As a result, FTSE Russell has broadened its climate range to the ‘linkers’ market with the launch of the FTSE Climate Risk-Adjusted World Inflation-Linked Securities Index Series.
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The index is comprised of inflation-linked government bonds with fixed-rate coupon payments that are linked to a consumer price index, measuring the performance of debt from 13 countries denominated in their respective local currencies. It measures the performance of inflation-linked fixed-rate, local currency, investment-grade sovereign bonds based on eligibility of the FTSE World Inflation-Linked Securities Index (WorldILSI) and adjusts for climate risk.
It also incorporates a tilting methodology that adjusts index weights according to each country’s relative climate risk performance. For example, the index tilts towards government markets that demonstrate a greater degree of resilience to the risks of climate change.
Scott Harman, global head of fixed Income product management at FTSE Russell, commented: “Government bond investors face several significant risks to the long-term performance of portfolios, including climate risk and inflation risk. Yet, investors have faced no index solution that simultaneously seeks to address these risks in what is a multi-trillion-dollar market. Our new index combines FTSE Russell’s leading position in the global linkers market with its innovative climate risk-adjusted government bond market indexes.”