By Don Gerritsen (@DonGerritsen), Head of Benelux, the PRI
Central banks around the world are increasingly paying attention to the opportunities of responsible investment for market stability and effective management of government reserves. Using a sustainability lens, central banks can more clearly identify material financial risks and harness the opportunities of more stable, sustainable markets.
There are three key reasons why central banks should be embracing responsible investment: market stability, management of government reserves and global collaboration.
Physical and transition risks around environmental, social and governance issues can lead to financial hazards such as underestimation of actuarial risks. An example is climate change, which is rising up the agenda of central banks. Climate change action is clearly supported by central banks in financial hubs such as the Bank of England and Banque de France.
Other sustainability issues, however, such as scarcity of natural resources, do not yet seem to be on the supervisor’s radar. For market stability, all material sustainability risks to the financial sector should be assessed and mitigated. Backward looking data should be complemented by future-oriented, potentially more qualitative, data.
Responsible management of government reserves
Central banks manage up to billions of official government reserves, mostly invested in a fixed income portfolio. Despite the fact that these assets are generally heavily regulated, several responsible investment strategies can be deployed whilst safeguarding investment returns. Central banks can help drive sustainability by establishing responsible investment frameworks for their balance sheets and reserves. This can be done by incorporating responsible investment at strategy, policy and asset class level. Responsible investment strategies for central banks are not significantly different from those of any other asset owner.
Central banks can play a pivotal role in helping to promote responsible financial markets by looking beyond the borders of the national market they supervise. The financial sector is truly global, as are sustainability themes.
Central banks can play a pivotal role in helping to promote responsible financial markets by looking beyond the borders of the national market they supervise
A good example is the Central Banks and Supervisors Network for Greening the Financial System (NGFS). The NGFS is a platform for central banks and supervisors with the aim of building a green financial sector, and to enhance the efforts of the financial industry in meeting the goals of the Paris climate agreement. This includes mobilising capital for green and low-carbon investments.
We can see further momentum in the fact that the Dutch Central Bank will become a PRI signatory tomorrow on 20 March 2019 – making it the first central bank in the world to do so. Through its membership, it will collaborate on global responsible investment and spread the word for more central banks to join the PRI.
Central banks and supervisors are increasingly aware of the risks of sustainability issues and opportunities of responsible investment, both from a supervisory, as well as a government reserves management perspective. A more comprehensive understanding of all material sustainability risks and opportunities, coupled with increased global collaboration, will drive more stable, sustainable financial markets.
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