While 60% of central banks have a broad environmental, social and governance (ESG) approach, fewer than one-in-five employ a climate-specific focus, according to a sustainable and responsible investment (SRI) survey from Network for Greening the Financial System (NGFS).
The survey polled central banks on five ESG strategies: negative screening, best-in-class, ESG integration, impact investing and voting and engagement.
“Negative screening and green bond investments are currently the most prominent strategies across central bank portfolios. Both are straightforward to implement as they do not necessarily require a significant adjustment of the asset allocation or the investment process,” it found.
As a result; NGFS, which consists of 46 central banks and supervisors and nine observers, has released a guide to support the adoption of sustainable investment principles in their portfolios and avert climate change as a financial risk.
“The work of the NGFS is vital to scale up the work of central banks and financial supervisors in the field of sustainable finance,” said Frank Elderson, chair of the NGFS and executive board member of De Nederlandsche Bank, the Dutch central bank.
“We thus send a strong signal to the financial system as a whole, to ensure that it turns green and sustainable.”
The scope of central banks to invest sustainably depends largely on the mandate underlying the portfolio, the report states.
Two high-level SRI objectives can be considered:
- (i) a financial SRI objective, which aims to address the impact of climate-related risks and/or ESG-related risks on the portfolio and seeks to generate financial returns; and
- (ii) an extra‑financial SRI objective, which aims to address the impact of the portfolio on the environment and society, alongside generating financial returns
Among specific challenges central banks face when pursuing SRI are: to stick to their legal policy mandate, invest responsibly while preserving liquidity, and safeguard independence and prevent conflicts of interest.
Taking the Nordic route
The report cites Norges Bank, the central bank of Norway, as one of those already applying SRI.
Next to central banking operations, the bank fulfils a separate investment mandate via the Norges Bank Investment Management, which manages Norway’s sovereign wealth fund, the Government Pension Fund Global, with a market value of NOK9,162bn (€900.8bn) at end of June 2019.
The objective for both portfolios is to achieve the highest possible return with acceptable risk, the report said, while it has also been given dedicated environment-related mandates from the Ministry of Finance.
It focuses on material ESG issues to improve the long-term performance of the investments and reduce financial risks stemming from ESG issues, and sits on three SRI pillars: (i) establishing principles, (ii) long-term active ownership and (iii) investing sustainably.
Norges Bank can opt for active ownership as an alternative to observation or exclusion decisions.
“The bank itself may also decide to divest from companies that impose substantial costs on other companies and on society as a whole,” the report writes.