Central banks continue climate action despite political pressure

Central banks are pressing ahead with action to tackle climate change, even as the political environment turns hostile in some jurisdictions.

Reserve managers have been adding new green assets and improving sustainability tracking, speakers at the Central Banking Summer Meetings said. Some have begun to aim for a positive impact on the climate as well as managing the risks.

The political backdrop for central banks is highly uneven. In some countries, particularly where right-wing parties are taking office, there is pressure from politicians for less action on the environment. In others, governments are much more supportive of central banks’ work on climate.

One central banker from Europe said their institution planned to change its messaging given a more hostile political environment, but would continue efforts to green its operations. The majority of speakers, however, said governments remained supportive of their climate work.

Two reserve managers from other European central banks said they were taking new steps to improve the sustainability of asset holdings. One, from a smaller economy, said the central bank was investing in green and social impact bonds, and had adjusted its equity portfolio benchmark to include a focus on climate risk.

This institution’s change “started from the investment side and has broadened to other activities”, the central banker said.

Another reserve manager, from a large European country, said the central bank had similarly started investing in green sovereign and supranational bonds several years ago. With this first step taken, it became necessary to “plug this into a more comprehensive framework”. The central bank adopted a sustainable investment charter and established a climate and sustainability hub to co-ordinate work across the institution.

Sustainability efforts are increasingly widespread at central banks. At the Summer Meetings, an audience poll revealed nearly half the attendees of the session (47%) formally recognise sustainability in their strategic asset allocation.

A further 29% include informal sustainability elements. Only 24% avoid sustainability altogether in reserves management – though the moderator noted a possible bias, given people had chosen to attend the sustainability stream of the conference.

As well as investing in greener assets, reserve managers are working to raise awareness about sustainability issues and boost transparency. The smaller European central bank is now actively trying to use its asset allocations to have a positive impact on climate change, as well as mitigating risks.

Double materiality

This idea of both mitigating risks and trying to tackle climate change itself brings central banks into contact with the concept of“double materiality”. Under the European Union’s corporate reporting directive, firms must report both how sustainability creates risks for them, and how their actions affect the environment and people.

One speaker from a large European country argued double materiality is important because supervisors need to ensure financial firms are not making the problem worse. The same applies to central banks’ own operations, he added.

This speaker’s central bank has aligned its own funds – notably the central bank’s pension portfolio – with an estimated “trajectory” for a 2ºC increase in average global temperatures.

A first step was to exclude around 20% of the investment universe based on firms’ poor environmental record. Then the central bank expanded holdings of green bonds. The institution is now working towards a 1.5º trajectory.

“It means when we are making business choices, we add these climate criteria,” the speaker said.

A central banker from Latin America echoed the European speaker’s sentiment on the importance of double materiality, but also noted the challenges. “You are looking outside the organisation, how your operations impact [the wider system],” she said. “So it tends to be more complex, but also more difficult for central banks to see any role in that regard.”

Green sovereign bond shortage

The reserve managers said big issues remain for greening reserves portfolios. Notably, there is a severe shortage of green sovereign bonds, while high demand for these assets mean they trade at a premium.

Frameworks, data and methods for green sovereign investing “have been lagging the corporate space”, one speaker said. There are fewer countries to invest in than for standard sovereign bonds and less liquidity is available.

“Concentration issues” present a “real challenge” for reserve managers, another said. However, both agreed it was important to continue work to improve green sovereign investing.