Building Net Zero Portfolios of Sovereign Bonds

Vol. 23, No. 3, 2025
By Gong Cheng, Eric Jondeau and Benoît Mojon

We propose a method for creating a sovereign securities portfolio that gradually reduces its carbon footprint, in line with the Paris Agreement. This allows passive investors to achieve netzero (NZ)targets while maintaining risk-adjusted returns similar to a business-as-usual benchmark. From 2015 to 2021, our approach would have cut carbon intensity by 34.7% with a 7.5% yearly target, compared to just an 8.5% reduction for the benchmark. Total emissions would have dropped by 27.5%, while they would have risen by 25.4% in the benchmark. Notably, NZ portfolios match the benchmark’s financial performance and creditworthiness without significant foreign exchange risks