The Bank of Italy has approved new investment criteria that single out companies that take action on climate change and exclude those that do not adopt UN principles on the environment, human rights, labour and anti-corruption. It will use an independent adviser to identify the best opportunities for investment.
Image: Volker Stetger / Science Photo Library
These criteria will apply by the end of June 2019 to the Bank’s shareholdings – worth €8bn – and, at an unspecified later date, to its corporate bond holdings, worth €1bn. It says that, as a result, greenhouse gas emissions from companies in its portfolio will fall by 23%, and energy and water consumption will drop 30% and 17%, respectively.
The Bank is a member of the Network for Greening the Financial System (NGFS), which has 36 members including the Bank of England. The NGFS acknowledges that climate-related risks are a source of financial risk and require collective action. In April 2019, launching its first collective report (banque-france.fr/en/financial-stability/international-role/network-greening-financial-system/first-ngfs-progress-report), Frank Elderson, NGFS chairman, noted that the financial risks from climate change are ‘analytically difficult, unprecedented and yet very urgent’.
The NGFS reports that much analytical work remains to be done to equip central banks and supervisors with appropriate tools to identify, quantify and mitigate climate risks in the financial system. Over the next year, the NGFS will publish technical documents to help, covering topics such as incorporating sustainability criteria into central banks’ portfolio management.
The report makes four recommendations for central banks: to integrate climate-related risks into financial stability monitoring and micro-supervision; integrate sustainability factors into own-portfolio management; bridge data gaps; and build awareness and intellectual capacity; and encourage technical assistance and knowledge-sharing.
The NGFS also calls on policymakers to achieve internationally consistent environment-related disclosure, and support the development of a taxonomy of economic activities.
‘The coordinated action of central banks to identify and manage the systemic risks of climate change on the real economy and the financial system is very important,’ says William Blyth, associate fellow at Chatham House and director of Oxford Energy Associates. The NGFS recommendations will help the shift towards greater scrutiny by investors, he adds. ‘I suspect the greening of Bank of Italy’s own portfolio will have only a small direct effect because of the relatively small scale of its commercial holdings, but should contribute to the wider indirect signals being sent to the commercial market by the NGFS actions.’
‘This is just the start of the pressure that the banks and financial markets will put on companies to adjust,’ says Kingsmill Bond of the financial thinktank Carbon Tracker. ‘Companies need to adjust to survive the energy transition in any event.’