The Riksbanks Climate Report 2021

How does the Riksbank work with climate-related risks?

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How does the Riksbank work with climate-related risks?

Asset management

Published: 4 May 2022

The Riksbank’s management of financial assets and the application of sustainability considerations

As part of its monetary policy remit, the Riksbank has purchased assets in Swedish kronor.[8] For monetary policy purposes, the Riksbank holds assets consisting of Swedish covered bonds (mortgage bonds), municipal bonds and corporate debt securities (corporate bonds and commercial paper). Assets consisting of treasury bills and government bonds are also included. This is a consequence of the Riksbank’s measures in connection with the coronavirus pandemic in 2020 aimed at keeping the level of interest rates low. These assets also include the Swedish nominal and real government bonds that the Riksbank purchased over the period 2015–2020 for monetary policy purposes. These assets include bonds issued by Swedish non-financial corporations. In these purchases the Riksbank applies a sustainability perspective.

The Riksbank also manages assets consisting of gold and foreign exchange reserves. These account for a large part of the Riksbank’s total assets and are worth approximately SEK 460 billion. The gold and foreign exchange reserves exist so that the Riksbank, in times of financial stress, can offer banks liquidity support in foreign currency and so that the Riksbank can perform foreign exchange interventions. The Riksbank also uses the foreign exchange reserves when it lends money to the IMF. In turn, these policy needs form a starting point for identifying contingency requirements for foreign exchange. A sustainability perspective is also applied in the selection of assets in the foreign exchange reserve.

Norms-based negative screening in the purchase of corporate bonds

When purchasing assets for monetary policy purposes, the Riksbank needs to consider the financial risks arising from this measure. Since January 2021, the Riksbank has therefore considered sustainability in its purchases of corporate bonds. This takes place through so-called norms-based negative screening, which means that the Riksbank only buys bonds issued by companies deemed to comply with international standards and norms for sustainability. The principles with which companies must comply span the areas of human rights, working conditions, the environment and anti-corruption.[9] See M. Andersson and M. Stenström (2021), “Sustainability considerations when purchasing corporate bonds”, Economic Commentaries, No. 3, Sveriges Riksbank.

The basis of the Riksbank’s negative screening is that it is riskier to purchase bonds issued by companies that are in breach of these principles. One aim of this screening is thus to limit the Riksbank’s financial risk linked to sustainability. Applying negative screening also allows the Riksbank to manage government funds prudently and contributes to good management based on the state’s core values. At the same time, the Riksbank must comply with the rules of monetary policy when selecting corporate bonds.[10] The civil law principles need to be taken into account, which means, among other things, that companies that are similar shall be treated equally and that departures or exemptions from this shall only be made on factual grounds. In addition, the positive effects of a decision to exclude a company should be in reasonable proportion to the possible damage that the measure may cause. Sustainability considerations will also be implemented with a view to avoiding distorting effects on the Swedish market for corporate bonds.

Carbon footprint of the holdings of corporate bonds to be reported

Since 2021, the Riksbank has reported the carbon footprint of its holdings of corporate bonds every quarter.[11] See the Riksbank’s website on the carbon footprint for its holdings of corporate bonds. In this way, the Riksbank aims to help promote the transparency of climate-related information. This reporting can also be seen as the first step of the Riksbank’s process towards increased reporting of climate-related information.

The Riksbank has undertaken to work towards publishing its own climate-related financial reporting in line with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD).[12] See “Joint pledge from the Swedish members of the NGFS, Finansinspektionen and Sveriges Riksbank, at the occasion of the NGFS Glasgow Declaration during COP26”, 3 November 2021. As a next step, the Riksbank also intends to calculate and account for the carbon footprint of other financial assets. Among other things, the Riksbank is looking at how to calculate the carbon footprint of the foreign exchange reserves and the holdings of government bonds. Calculating the carbon footprint also gives a first indication of the CO₂ intensive assets to which the Riksbank is exposed. This analysis is part of the Riksbank’s work of calculating and measuring climate-related risks for the Riksbank’s financial assets.

When the Riksbank reports the carbon footprint of its holdings of corporate bonds, it uses weighted average carbon intensity, which is a measure that sums up each company's carbon intensity. At present, only a minority of companies report their emissions. This means that the carbon footprint is partly calculated on the basis of estimates of emissions, which means that the measure gives more of an indication of the carbon footprint of the Riksbank's holdings (Figure 1).[13] For more information on how the carbon footprint is calculated, see J. Blixt, E. Brattström and M. Ferlin (2021), "Sustainability reporting - need for greater standardisation and transparency", Economic Commentaries, No 4, Sveriges Riksbank. At the same time, the number of companies reporting their emissions is increasing. As more companies report their emissions, the reliability of the measure will also increase. Table 1 shows how the availability of carbon dioxide emissions data differs between listed and non-listed companies. Of the listed companies that meet the Riksbank's purchase criteria, almost 80 per cent report emission data, while for the non-listed companies it is only 12 per cent.

Figure 1. Weighted average carbon intensity for the Riksbank’s corporate bond holdings

Figure: Weighted average carbon intensity for the Riksbank’s corporate bond holdings

Note. The figures apply per 30 September 2021. The weighted average carbon intensity is reported for all companies the Riksbank has in its portfolio of corporate bonds, and is calculated on the basis of companies’ reported emissions of greenhouse gases and estimates made by Sustainalytics. Of all the companies that the Riksbank has in its holdings of corporate bonds as of September 30, approximately 48 per cent report their greenhouse gas emissions.
Sources: The Riksbank and Sustainalytics.

Table 1. Number of companies that meet the Riksbank’s purchase criteria and report information on CO₂ emissions
  Number Report emissions of greenhouse gases
Listed companies 30 23 (77 per cent)
Non-listed companies 26 3 (12 per cent)

Note. The table shows the companies with bonds that meet the Riksbank’s purchase criteria as of 31 October 2021, that is, the criteria for purchasing corporate bonds set up by the Riksbank. These include credit ratings, direct financing and maturity, market neutrality and sustainability. [14] For more information on the requirements to be followed, see D. Hansson and J. Birging (2021), "The Riksbank’s asset purchases during the coronavirus pandemic", Economic Commentaries, No. 12, Sveriges Riksbank.

Sources: The Riksbank and Sustainalytics.

The Riksbank considers sustainability in its choice of assets in the foreign exchange reserves

The Riksbank’s financial risk and investment policy acts as a framework for the management of the foreign exchange reserves and defines the requirements placed on the foreign exchange reserves so that readiness to use them is good. For example, the policy states that the assets in the foreign exchange reserves should have ample liquidity. This is why the foreign exchange reserves largely consist of government bonds issued by states with high credit ratings. The policy also states that the foreign reserve reserves should contribute to safeguarding the Riksbank’s financial independence and that asset management should be conducted efficiently and in such a way that it will not damage the reputation of the Riksbank. Since 2019, the policy also says that the Riksbank must consider sustainability in the choice of assets in the foreign exchange reserves.[15] The financial risk and investment policy establishes the principles for the Riksbank’s investments in the gold and foreign currency reserves. Taking the contingency requirements as a starting point, the policy defines the permitted composition of assets and currencies, and acts as a framework for management.

This takes place in various ways. For example, the Riksbank assesses new assets on the basis of sustainability factors such as climate, social responsibility and governance before they can be included in the foreign exchange reserves. This assessment lets the Riksbank takes good management based on the state’s core values into account. In addition, the Riksbank also measures the carbon footprint of assets in the foreign exchange reserves. As far as is possible, the Riksbank chooses a composition of assets that limits the total carbon footprint of the foreign exchange reserves, without this having an excessively negative impact on return. As a result of these sustainability considerations, the Riksbank has made some adjustments to its holdings in recent years.[16] In 2019, the Riksbank decided only to invest in Australian states and Canadian provinces with the same or lower carbon footprint as their respective countries. However, sustainability considerations must not impair the Riksbank’s readiness to offer liquidity support or to be able to buy and sell currency for monetary and exchange rate policy purposes.

The Riksbank owns green bonds

Green bonds are included in the Riksbank’s assets in both foreign currency and Swedish kronor. This is because green bonds form a natural part of the markets in which the Riksbank is active and the Riksbank therefore currently assesses green bonds on the same grounds as other assets in its administration.