Sustainable and responsible investment of the Bank’s non-monetary policy portfolios
Sustainable and responsible investment (SRI) principles are increasingly guiding the Bank’s activities. For its non-monetary policy portfolios in particular, the Bank recognises sustainability as a fourth objective of its strategic asset allocation policy, alongside liquidity, safety and return. Building on existing efforts, the Bank continues to take steps to further the transition to a sustainable and inclusive net-zero economy.
The Bank’s own portfolios are those that are not held for monetary policy reasons. For well over a decade, sustainable and responsible investment principles have been gradually integrated into the management of these portfolios.
Integrating ESG criteria
Since 2004, the Bank has been investing a portion of its own reserves in corporate bonds, as part of a diversification strategy. Corporate bonds offer more opportunities to apply sustainable and responsible investment criteria than sovereign (government) bonds, which traditionally make up a very large share of most central banks’ balance sheets. As a result, since then the Bank has started screening out those bond issuers that failed to take into account the non-financial impact of their activities. Moreover, a few years later, the Bank started limiting its corporate bond investments to companies with a sufficiently high performance in their sector as measured by environmental, social and governance (ESG) criteria. Building on that approach, in 2019, the Bank decided to raise the share of corporate bonds to strengthen the sustainable character of this portfolio.
Continuing the focus on diversification and on integration of ESG criteria, the Bank began investing in equities in 2019. The passive management of the Bank’s equity portfolio has been entrusted to an external fund manager. The benchmark index was constructed for the Bank by a third party and requires that companies meet specific ESG standards.
Financing the transition
By investing in thematic assets, such as green, social and sustainability bonds, the Bank helps finance the transition to a sustainable and inclusive net-zero economy. These bonds are issued by companies, governments and supranational institutions to fund projects with environmental or social benefits. To this end, the Bank takes care to invest in debt securities aligned with international standards, as verified by a second party. Purchasing these types of securities also supports the UN Sustainable Development Goals, with a contribution to these objectives often explicitly laid out in the related bond framework.
In 2021, the Bank created a dedicated portfolio that invests solely in thematic bonds. In 2022, the nominal investment value of this portfolio reached its $1 billion target. As the thematic bond market took off only a decade ago, it is still relatively small. However, this market has grown significantly, and the Bank expects the importance of green and social bonds, as well as their relative share in its total portfolio, to continue this growth trend over time.
Strengthening and disclosing our approach
In early 2023, the Bank took two important steps forward by publishing a Sustainable and Responsible Investment Charter and the first climate-related disclosures for its non-monetary policy portfolios.
The Charter informs and guides management of the Bank’s own financial reserves. It builds on the Bank’s existing approach to sustainability, as supplemented by best practices, and incorporates insights and experience from international fora and institutions, such as other central banks and the Network for Greening the Financial System.
At the same time, the Bank published its first annual disclosures on climate-related risks in order to inform the general public of the impact of such risks on its own portfolio management. The disclosure methodology is based on the recommendations of the Task Force on Climate-related Financial Disclosures, a body established by the Financial Stability Board.
Broadening and sharing our knowledge of sustainable investment
The Bank participates in a number of sustainable and responsible investment networks and working groups, which enables it to develop and share knowledge. For example, it is active in the Network for Greening the Financial System, a voluntary coalition of more than 120 central banks and prudential supervisors aimed at managing climate-related and environmental risks to financial stability and speeding up the greening of the financial system.
Going beyond own portfolio management
In 2022, the Bank was selected as the central securities depository for the Next Generation EU (NGEU) programme, which is expected to have a total value of €800 billion by 2026. The purpose of NGEU is to support the economic recovery from the pandemic and to shape this recovery in order to further the EU’s broader objectives, including the transition to a low-carbon economy. More information on NGEU can be found here.
Furthermore, the Bank continues to refrain from charging any issuance fees in its securities settlement system for the issuance of green, social, and sustainability bonds aimed at funding investments benefitting the environment and society. This waiver of issuance fees also benefits NGEU, as 30% of the programme’s funding (or roughly €250 billion) will be provided by the European Commission through the issuance of green bonds, making the Commission the world’s largest green bonds issuer.
Building on what is already in place, the Bank plans to strengthen its integration of sustainable and responsible investment principles in the coming years. While the general direction is known, specific actions will be fine-tuned and updated as warranted.