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When investors thought about how climate change might affect their portfolios a decade ago, their attention was usually focused on the companies they were investing in. How big was a firm’s carbon footprint, for example, compared with its industry peers? Nowadays, people looking at climate risk are increasingly focused on a new problem: the assets issued by governments.

Numerous sovereign bond funds focused on environmental, social and corporate governance (ESG) have emerged in the past 18 months, launched by everyone from the giant BlackRock to smaller firms such as Legg Mason and Ninety One. FTSE Russell has a climate risk sovereign debt index. These services cater to growing demand for ways to filter out climate risk in sovereign bond portfolios, and even the European pensions and insurance regulator Eiopa is paying more attention to how climate change could present risks to government bonds...

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