Sustainability is in the limelight today, constantly and everywhere. You no longer need to browse your newspaper to the inside pages for ESG (Environmental, Social, Governance) topics, nor will you find them buried in the appendices of corporate reports.
Sustainability can be seen and heard in all communication and, most importantly, in actual operations too. But to ensure in-depth integration of sustainability into investments, further improvements in the quality and scope of the available data is required.
Central banks are in step with the change
Not even central banks are immune to this change. A detailed roadmap for incorporating climate change considerations into monetary policy was published in connection with the European Central Bank’s strategy review. In the management of central banks’ own investment assets, the risks and opportunities associated with climate change are increasingly noted in reporting and investment decisions. A concrete example of this is the joint decision of the ECB and the euro area central banks in early 2021 on a common stance for reporting climate risks of non-monetary policy portfolios. Comparable reporting will begin in early 2023 at the latest.
The several thousand signatories of the UN-supported Principles of Responsible Investment (PRI) include a handful of central banks, indicating that the role sustainability plays in the management of central banks’ investment assets goes beyond the climate change perspective. While central banks have been lagging behind many other investors, their efforts to address social responsibility in their (investment) activities are now progressing in leaps and bounds.
Increased reporting requirements
The advancement of ESG also means that new practices are adopted and new investment products launched in the market. Responsible investing is not just about excluding anymore: active ownership, engagement processes, thematic investments, different tilts and measuring the impact of investments add much more colour to the palette. These changes impose additional requirements on issuers as investors demand more extensive information about the issuer’s objectives and the impact of its activities on the surrounding society as well as the impact of the environment and society on the issuer. Investors draw on high-quality, comprehensive and comparable information as part of their investment decisions, risk assessments and goal setting, not forgetting investors’ own reporting to their stakeholders. Data is also needed in developing climate risk models and calculations.
Actions of the Bank of Finland
The Bank of Finland’s Board has approved responsible investment principles, which describe how the environmental, social and governance issues are recognised in the bank’s asset management. ESG integration, norm-based screening and thematic investments are Bank of Finland’s responsible investment approaches. The Bank has also set a climate target for achieving carbon neutrality by 2050 at the latest for its entire investment portfolio, excluding gold for which no international calculation standard exists yet.
For government bonds, the Bank has set a qualitative target to maintain public debate on climate change.
To reach the goal of carbon neutrality, different actors must succeed in attaining their targets. To make sure that this goal can be reached, the Bank of Finland has set interim targets for each asset type. For government bonds, the Bank has set a qualitative target to maintain public debate on climate change, thus encouraging governments to set adequate national determined contributions. For equities, the Bank has set a quantitative target of a 50% reduction in emissions by the end of 2025. The interim targets set for different asset types will be developed and reviewed regularly, and their progress published as part of investment reporting.
The Bank of Finland was one of the first central banks to sign the UN-supported Principles of Responsible Investment, which encompass an extensive obligation to report on the principles, organisation, targets and impacts of investments. The Bank of Finland will take into account the recommendations directed at central banks and international reporting frameworks, including the TCFD, when developing its reporting.
Good and responsible reporting
ESG reporting is not only about looking back; it can also be used to develop activities. Good reporting builds trust, promotes openness and supports the organisation’s work. This is why it also plays a key role in a central bank’s communication.
