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GPI 2019 special report: Central banks and climate change
Addressing climate risks to economies
The global central banking community spent the last decade repairing the financial system after the international banking crisis. The OMFIF ESG special report, part of the Global Public Investor 2019 highlights how central banks are turning their attention to the longer-term challenge of improving the climate resilience of the financial system and the wider economy.
Central bankers’ deepening interest in the subject is reflected in the growing number of speeches on issues related to climate change. Between April 2018-March 2019, there were 23 central bank speeches on these subjects.
Central banks are attempting to act on their climate rhetoric by integrating sustainability criteria into their operations and portfolio management. In December 2017 during the One Planet summit and at the initiative of the Banque de France, eight institutions from four continents set up the Central Banks and Supervisors Network for Greening the Financial System. Chaired by Frank Elderson, executive director for supervision at De Nederlandsche Bank, the group has since grown to 36 members from 29 jurisdictions.
However, not all central bank reserves management practices match the climate agenda’s strong momentum. Less than half of central banks responding to the 2019 OMFIF GPI survey reported they were investing part of their reserves in green or sustainable assets. This compares with almost all pension funds and sovereign funds we surveyed.
Often, central banks are more constrained than other types of GPIs in terms of what asset classes they are eligible to purchase. Several central banks also cited lack of supply, remarking that ‘in our investment universe there is a limited supply of green bonds.’ Others referred to the inability of sustainable assets to meet their liquidity and maturity thresholds. One central bank stated that ‘very long durations of green bonds are problematic when our bond duration is very short.’
ESG criteria are gaining importance when it comes to outsourcing portfolios to external managers. When investing in green assets, green bonds are the dominant instrument for GPIs. They were chosen by 79% of those surveyed who invested in green assets.
Looking ahead, around 60% of GPIs surveyed by OMFIF stated that they plan to ‘increase’ or ‘significantly increase’ their green investments.
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