Getting the most out of sovereign engagement

Investor engagement with governments on their climate commitments can be a powerful complement to other forms of stewardship. It can also help investors identify opportunities and mitigate risks, says Thomas Dillon.

Important information

Read this article to understand:

The role sovereign engagement can play in managing climate risks within fixed income and beyond
The levers investors can use to engage with governments
Why it’s a pivotal time to engage on countries’ national climate plans

Engagement enables investors to gather insight about the organisations they are invested in and to share their perspective on risks, opportunities and actions that can unlock value. But it isn’t a one-way street: issuers can use the process to showcase their credentials and attract capital. Ideally, engagement should enable both parties to reach a better understanding of the investment case.

When these interactions focus on the challenges posed by climate change, biodiversity loss and social issues, engagement can also be a powerful lever for change.

Engagement can take different forms depending on the asset class. For equity investors, company dialogue often goes hand in hand with voting and can involve the company CEO or Chair.¹ Within fixed income, bondholders can engage with a wider pool of companies and use touchpoints with CFOs or Treasurers through the lifecycle of a bond.

But engagement can also take place at other levels. At Aviva Investors, we recognise engagement with actors across the financial system can maximise the long-term value of our clients’ investments. That’s why we have evolved our approach so that we use the various levels of engagement available to us (see Figure 1).

Figure 1: The levels of engagement

Source: Aviva Investors, as of April 22, 2025.

We also recognise the financial system is complex and highly interconnected, and engaging at each level has limitations. That’s why we aim to facilitate feedback loops across the different levels of engagement and with our investment desks, to ensure interventions at different levels of the system mutually reinforce each other. We refer to this multifaceted approach as “holistic stewardship”.²

While fixed income investor engagement has tended to focus on corporate issuers, sovereign bonds also provide a valuable touchpoint at the country level.

After all, the counterparties to sovereign bonds are policymakers, with finance ministries and central banks acting as the typical contact points for investors. By holding the purse-strings and setting interest rates, both institutions play a significant role in managing economy-wide risks.

That includes their influence on sustainability-related issues, such as climate mitigation and adaptation measures, which can bolster an economy’s resilience. For example, public spending in response to extreme weather events is increasingly impacting government balance sheets, which are already under strain in many cases. With policymakers facing difficult trade-offs, sovereign engagement helps investors understand the progress they are making and support actions that reduce risk.

Sovereign bonds are a mainstay in many diversified portfolios, providing core income, offering capital opportunities, and helping investors meet regulatory and liquidity requirements. Where divestment of certain issuers is not an option for investors, engagement to ensure climate risks are being managed becomes even more important to increasing the long-term resilience of portfolios.

Seeing the bigger picture

Beyond sovereign bonds, country-level engagement can play a role in managing risks across other parts of investors’ portfolios due to policymakers’ role in setting the “rules of the game”. Those rules shape the operating environment for companies and can determine the profitability of various economic activities. That is crucial context for corporate and private market investments.

Well-designed policies can expand the pool of sustainable investments

An enabling policy environment is vitally important in addressing market failures like climate change. Without it, companies that invest to rapidly reduce emissions may put themselves at a competitive disadvantage. On the other hand, well-designed policies can expand the pool of sustainable investments and advance sectoral transformations at pace.

In this respect, diversified investors again add a valuable perspective. By pooling insight from different asset classes and levels of engagement, they bring a rare economy-wide and long-term viewpoint. This can be a powerful counterpoint to the voices of incumbents that benefit from the status quo.

Furthermore, sovereign engagement provides a route into “macro” engagement on system-level risks, reflecting the pivotal role national policymakers also play in preserving the integrity of the whole financial system.³ As well as direct action, governments can leverage their membership and shareholdings in international institutions that co-ordinate global action, such as the G20, United Nations Framework Convention on Climate Change (UNFCCC) and the International Monetary Fund (IMF).

Investors can engage directly with these international institutions as well, but their dialogue with individual governments can also have an impact at this highest level.

In 2024, we engaged with over 50 sovereign issuers on material sustainability topics, using numerous approaches.

Throughout our sovereign engagements, we remain aware that investors are one stakeholder among many, and that each government is ultimately responsible to its citizens. We prioritise engagements on topics that are the most financially material and where action aligns with commitments governments have already made.

As we covered in our 2022 whitepaper “Use your influence”, sovereign engagement brings new challenges and investors in sovereign bonds have different levers, rights and responsibilities to corporate investors (see Use your influence: Overcoming the challenges of sovereign engagement).⁴ Despite this, sovereign issuers have become steadily more willing and able to discuss sustainability factors with investors in recent years. Ministries of finance often facilitate access to specialists across government, while novel data can help investors identify engagement priorities, like the Assessing Sovereign Climate-Related Opportunities and Risks (ASCOR) framework, which assesses government issuers’ performance across climate metrics.⁵ Our proprietary sovereign ESG score draws on the latest data to provide a comprehensive overview of potentially material sustainability factors.

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Use your influence

Knowing which governments and contacts to speak to – and on which topics – opens the door to a rich set of engagement options. This includes systematic communication through letters as well as complementary bilateral outreach, consultation responses, participation in government advisory groups, and attendance at issuer roadshows.

Going further together

Collaboration strengthens our efforts. For example, leveraging our firm-wide holistic approach, we can bring into government consultation responses insights from our regular value-chain roundtables, which gather representatives from across key sectors to explore obstacles to decarbonisation and identify actionable solutions.⁶ Working in the other direction, insights from sovereign engagements can contextualise tailored corporate stewardship priorities, particularly with state-owned enterprises.

We also engage alongside other investors through initiatives like the Principle for Responsible Investment’s (PRI) collaborative sovereign engagement on climate change in Australia, which we helped establish in 2022.⁷ By pooling our resources and accessing local expertise, we can better navigate complex sovereign systems to engage more deeply and with a wider range of organisations. Given the programme’s success, the PRI is expanding it to Canada and Japan. We have joined both initiatives.

To further galvanise action and reach new audiences, we also collaborate with influential non-governmental organisations (NGOs) and academic institutions.

Starting in 2024, we used all these tools as part of a multi-faceted sovereign engagement programme to support the development of credible national climate plans. We believe such plans are crucial to governments’ ability to navigate material climate-related risks and associated trade-offs.

The Paris Agreement requires signatories to develop plans, named Nationally Determined Contributions (NDCs), that outline how each country will reduce emissions and build resilience. Governments submit new, more ambitious NDCs every five years. The next iteration is due in 2025.

At the same time, we are acutely aware that many governments are facing high debt levels, hindering their ability to take more direct action. That means there is a growing need for policymakers to attract more private capital to help underpin their renewed climate ambitions. NDCs provide an opportunity to do just that, so this year is critical.

A blueprint for action

We first identified the features of NDCs that could catalyse private investment. They include setting ambitious headline emissions-reduction targets and, crucially, grounding those targets in information about the actions governments will take to deliver them. This can include setting out sector-level decarbonisation pathways, indicative policies, and associated investment plans or prospectuses. We also identified enablers, such as measures to manage how the costs and benefits of climate action are shared across society.

These features add clarity as to whether and how emissions reductions will be delivered, through signals about incoming supply or demand-side sectoral policies, technology phaseout timelines, new fiscal review streams or costs, and even co-investment opportunities.

These economic incentives make it pay for businesses to invest in line with climate targets

These economic incentives constitute a form of forward guidance on climate policy and make it pay for businesses to invest in line with climate targets. They also serve as a direct input to portfolio manager decisions on sovereign, corporate and private market investment. For emerging markets, credible national climate plans can also show where official international climate finance is needed.

Over time, such features should enable NDCs to act as a step towards detailed national transition plans, which we consider essential to support the long-term viability of corporate transition plans.⁸

Pulling out all the stops

In early 2024, we sent tailored letters to finance ministers from countries where we are materially invested, building on our experience of sharing sovereign engagement priorities with governments since 2021. We set out the investment case for credible national climate plans that included the above features.

We then sought to establish a dialogue with policymakers through follow-ups and consultation responses, culminating in meetings with representatives from more than 15 countries, including Japan, Mexico and Brazil. In each, we brought a valuable capital-market perspective and framed our views to align with policymakers’ interests.

Attending forums like COP29 in Baku and the IMF and World Bank Spring Meetings in Washington, D.C. enabled us to conduct even more sovereign engagements, including with major issuers like the US. And through the collaborative engagement pilot in Australia, we engaged with various government departments, regulators, advisory bodies and sub-sovereigns as a lead investor for our NDC priority.

We held 17 meetings on policies that could form part of a credible national climate plan

In the UK, we went further by publishing a low-carbon investment policy roadmap in July 2024.⁹ Following its publication, we held 17 meetings with a range of UK government departments on policies that could form part of a credible national climate plan. We are also represented on the UK’s Net Zero Council and other advisory bodies.¹⁰

We amplified all these engagements through our holistic approach to stewardship. Company and value-chain engagements helped shape our views on sectoral plans and the UK policy roadmap. Our dialogue with relevant international institutions, such as the G20, Coalition of Finance Ministers for Climate Action and IMF, centred on the supportive role they could play on national climate planning.

We also collaborated with NGOs and academic institutions like the Institutional Investors Group on Climate Change (IIGCC), Centre for Economic Transition Expertise (CETEx) and the NDC Partnership on influential reports that added depth to priority NDC features, such as decarbonisation roadmaps and investment prospectuses.^11,12,13,14 The IIGCC presented its report’s findings to EU policymakers, while a related CETEx report was shared as a policy paper with the G20.¹⁵

Aviva Investors experts also spoke at high-profile public events on national climate action.¹⁶ Taken together, these activities helped galvanise the wider industry and contributed to investor views on national climate planning gaining significant traction.

Getting the ball rolling

National climate planning involves complex systems and multiple stakeholders, and we should not overstate our influence. But we shouldn’t understate it, either. Policymaking doesn’t happen in a vacuum and, where we have engaged, we have brought a valuable perspective to the table.

We were pleased to see that, among the new NDCs already published, many included new emissions reduction targets alongside detail on the sectoral transformations that underpin delivery. For example, Brazil’s NDC implementation will rely on its national process of updating the National Plan on Climate Change, including 16 sectoral adaptation plans and seven sectoral mitigation plans.¹⁷ The UK’s NDC cross-references the Clean Power 2030 Action Plan which outlines a range of specific actions the government will take to transform the power sector.¹⁸ And in October 2024, the G20 ministers committed to national transition planning to underpin NDCs.¹⁹

But we have several months to go before November 2025’s COP30, which is when we expect most countries to have published their NDCs. We are therefore continuing to engage, and to iterate and refine our approach to this emerging area of stewardship.

In 2024, only around half of PRI signatories engaged with policymakers directly or indirectly, and two-thirds of those did so via collaborations.²⁰

Yet as risks evolve, so too must investor stewardship practice. Company engagement remains effective and necessary, but we should not overlook other levers we have, such as sovereign engagement, nor other risks we face, such as systems-level risks.

Our holistic approach to stewardship enables us to use the most effective lever for each issue. This is often at the policy level, so including sovereign engagement in our toolkit gives us a more rounded view of the investment landscape and allows us to play our part in supporting governments to mitigate risks, attract capital, and deliver sustainable long-term returns.

To learn more about our sovereign engagement approach, read our 2022 whitepaper “Use your influence: Overcoming the challenges of sovereign engagement".

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