Management of financial assets
5.2 Responsible investment: building innovation on a solid foundation
Responsible investment is a key element in the approach the Bank of Finland takes in the management of its financial assets. In December, the Board of the Bank adopted the Principles for Responsible Investment underlying its investment activities. In 2020, the Bank reformed its responsible investment practices.
The Bank of Finland’s investment activities in a nutshell
The objective of the Bank of Finland’s approach to asset management is to meet the liquidity, security and return requirements placed on the central bank in respect of the assets managed.
In its investment activities, the Bank of Finland secures the value of its financial assets and its ability to support the liquidity of the banking system, whenever necessary, by means of its foreign reserves, for example.
The Bank of Finland invests and manages its financial assets in accordance with central bank objectives and taking into account the risks and sustainability aspects related to investment activities.
The sustainability aspects considered by the Bank of Finland in its investment activities are based, on one hand, on the objective to meet the sustainability requirements for investment activities and, on the other hand, on the objective to improve the management of various risks.
Sustainability is a component in the Bank of Finland’s portfolio management
In December, the Board of the Bank of Finland adopted the Principles for Responsible Investment that underlie its investment activities. Put simply, responsible investment means recognising the relevant ESG (Environmental, Social, Governance) factors when taking decisions on investment.
Different asset classes are associated with various characteristics. Every investor must choose the approaches and tools that best suit their investment strategy and portfolio.
The financial assets held by the Bank of Finland mainly consist of investments in government and government-related debt instruments as well as covered and corporate bonds.
The Bank also has equity investments and investments in real estate, managed by external fund managers.
The Bank of Finland’s approaches to responsible investment
The main approaches to responsible investment are ESG integration, thematic investment and norm-based screening.
The Bank of Finland’s portfolio managers integrate ESG factors with portfolio management and investment decision-making. Responsibility is therefore not something that is delegated to external specialists or service providers.
The Bank also requires external managers to take into account responsible investment aspects. We pay attention to responsibility in our monitoring of fund managers and funds throughout the duration of an investment.
Thematic investment is another of the Bank of Finland’s approaches to responsible investment. For an investment to be included in the thematic investment category, it must be certified by an external party.
The Bank of Finland requires its direct investees to comply with international norms. It does not invest in securities issued by organisations that do not adhere, for example, to the responsible business principles of the United Nations Global Compact.
Nor does the Bank make direct investments in companies that manufacture weapons prohibited under international treaties.
Decisions on issuer exclusion are taken by the Bank’s internal working group on responsible investment. The group reports regularly to the Board on such matters as investment portfolio responsibility and issuers that have been excluded.
2020 brought improvements in how the responsibility of external fund managers is monitored
The Bank of Finland’s investments in equities and real estate are held in funds managed by external fund managers.
Consequently, it is very important that these fund managers are properly monitored in terms of responsible investments, for example in the way they pursue an active ownership strategy, produce environmental reports and perform in international comparisons.
In 2020, the Bank of Finland stepped up the way it monitors factors associated with the responsibility of fund managers, using a special questionnaire for the purpose.
It also broadened the scope of the data obtained from norm-based screening to apply to its external asset management companies and counterparties for security transactions undertaken as part of its investment activities.
Climate targets are crucial
The Bank of Finland has carried out its first portfolio carbon footprint calculations and scenario analyses to examine the current situation and identify the risks associated with climate change, as well as the opportunities it provides, and to establish new climate objectives.
The calculations it has made have enabled the Bank of Finland to identify the largest sources of carbon emissions in its direct investments.
The purpose is to integrate climate objectives with the Principles for Responsible Investment sometime in 2021.
We follow the principles of responsible investment (PRI) in our investments activities. We renewed our own principles of responsible investment.
Cooperation both in the international context and on the home front will aid the establishment of responsible working methods
The Bank of Finland has signed the UN-backed Principles for Responsible Investment (PRI).
The PRI signatories commit to reporting on their responsible investment activities within a common reporting framework. The Bank of Finland relies on its reporting experience to raise awareness of sustainability/responsibility in the management of its assets.
The Bank is furthermore a member of the NGFS (Network of Central Banks and Supervisors for Greening the Financial System) and the Finnish organisation Finsif ry (Sustainable Investment Forum).
The NGFS is an international network of cooperation for central banks and financial supervisors. Finsif is a Finnish association concerned with sustainable investment. The goal of both organisations is to promote responsible investment and take account of the themes of sustainability.
In addition, in 2020 the Bank of Finland took an active role in Finnish and foreign responsible investment work groups, was involved in the debate on the subject and published articles in various publications.
The Bank of Finland has examined the reporting recommendations made by the TCFD (Taskforce on Climate-related Financial Disclosure), which is a reporting framework to help organisations produce comparable information on the risks and opportunities associated with climate change.
Questions regarding compliance with the TCFD recommendations are also asked in the annual UN PRI reporting framework.
Not all the TCFD recommendations have not yet become an established part of the Bank of Finland’s activities and reporting, but they will be taken into account in future developments.