Management of financial assets
5.2 Bank of Finland's goal is a carbon-neutral investment portfolio
In 2021, the Bank of Finland set a carbon neutrality goal for its investment portfolio and announced the first intermediate targets for its climate roadmap. The regularly reviewed intermediate targets ensure we will reach the net-zero target for the Bank's investment activities.
Responsible investment is a key component of the Bank of Finland’s asset management. In 2021, sustainability was added as an objective for guiding the Bank of Finland's investment activities, alongside liquidity, security and return.
The Board of the Bank of Finland adopted in December 2021 the updated public responsible investment principles, which the Asset Management division implements in practice.
The Bank of Finland has already earlier chosen ESG (environmental, social, governance) integration , thematic investment and norm-based screening and exclusion as the most important approaches to responsible investment.
The Bank of Finland develops reporting to take into account the recommendations of the TCFD disclosure framework
In 2021, the Bank of Finland gave public support to the international TCFD disclosure framework (Task Force on Climate-related Financial Disclosures) that focuses on the threats and opportunities presented by climate change.
The TCFD recommendations provide to companies, investors and lenders a framework for reporting climate risks using commonly accepted specifications.
The Bank of Finland has issued a public commitment to supporting these recommendations and develops its own reporting to take into account the TCFD recommendations.
The TCFD framework consists of four thematic areas: governance, strategy, risk management, and metrics and targets.
The recommendations for the thematic areas include further recommendations that the committed organisations should strive to fulfil.
Management: the management of climate risks and opportunities in the organisation
The Bank of Finland Board approves the objectives of the Bank's investment activities and the responsible investment principles.
In 2021, the Board approved the updated responsible investment principles and a carbon-neutrality target for its own investment activities.
In addition, a roadmap was prepared and intermediate targets were defined for guiding this long-term target. The intermediate targets and the next steps on the roadmap are described in a press release.
These climate targets together with the responsible investment principles constitute an entity whose realisation the Bank of Finland Board monitors regularly, at least once a year.
The Bank of Finland also has a responsible investment working group . The task of the working group is to supervise and monitor the implementation of responsible investment activities and report thereon.
The working group includes the Head of Market Operations and representatives from the Risk Management and Asset Management divisions as well as the responsible investment expert. The working group meets at least once every quarter.
The climate risks and opportunities of individual investments and external asset managers are monitored by the Bank's Asset Management division, as part of standard portfolio management.
Strategy: the disclosure of potential and actual climate impacts from the perspective of business, strategy and financial planning
The Bank of Finland’s most significant climate impacts arise from its investment portfolio. The climate impacts of other activities are examined as part of the Bank of Finland's comprehensive sustainability programme.
The climate goal is a long-term target, and to ensure achievement of the target, the Bank of Finland Board has decided on intermediate targets for the first stage in its climate roadmap. The achievement of the intermediate targets and the setting of new intermediate targets is reviewed regularly.
The Bank of Finland excludes from its direct investments companies whose turnover exceeds the maximum limit defined by the Bank of Finland on fossil fuels, unless the companies have a credible plan to fall below the limit values.
Bank of Finland experts participate actively in various working groups aimed at promoting the accounting and reporting of climate risks.
Calculation methods must be developed and data quality and coverage must be improved to strengthen further the use of climate information to support investment decisions.
In equity investments, the Bank of Finland's focus is on the stewardship activities of asset managers and the selection of the benchmark indices applied.
Asset managers exercise shareholder rights, for example via active voting and engagement processes. By changing the benchmark index, the holdings of the passive portfolio can also be changed significantly.
However, sufficient change cannot be achieved by mere exclusion; a larger impact in the longer term can be achieved via active ownership.
In real estate investments, the Bank of Finland pays attention to building specific environmental certificates , the climate targets set on individual funds, as well as the real estate funds’ results and measures taken in accordance with the international GRESB benchmark (formerly: Global Real Estate Sustainability Benchmark).
GRESB is an organization that performs ESG surveys and assessments on real estate and infrastructure investments.
In addition, the Bank of Finland continues to make thematic investments in green, social and sustainability bonds, taking account of the market condition.
Risk management: identification, assessment and management of climate risks
The identification of climate-related financial risks and opportunities requires a large amount of information suitable for investors.
In addition to the Bank of Finland’s own data procurement already in use, the intention during 2022 is to start using the climate data from the Eurosystem climate data procurement.
External data facilitates and enhances identification of the most significant climate impacts of the portfolio. In addition to identification, assessment and risk management, the climate impacts of the portfolio are disclosed to various levels of the organisation.
In addition, external asset managers are monitored regularly with the help of climate targets, reporting and surveys. The results fall within the scope of the internal reporting of the impacts of investment activities.
Measurement and targets: calculation of the carbon-intensity of the investment portfolio and consistent disclosure of climate risks
Definition of the carbon-neutrality target for the Bank of Finland's investment portfolio is based on the greenhouse gas emissions that are defined in the Kyoto Protocol and converted into carbon dioxide equivalent (CO2e) emissions in accordance with market practice.
Calculation of the portfolio’s carbon intensity is based on the weighted average carbon intensity (waci) metric recommended by the TCFD.
The calculation includes the first two scopes of the carbon footprint metrics: scope 1, i.e. investment entities’ direct own emissions and scope 2, i.e. investment entities’ emissions from purchased electricity and energy. Scope 3 emissions, i.e. emissions that occur in the value chain, can be included later. The target applies to the entire investment portfolio, excluding gold, for which an internationally accepted carbon footprint method does not yet exist.
In addition, in early 2021, the Eurosystem national central banks, together with the European Central Bank, agreed on a common stance for climate-related disclosures for non-monetary policy portfolios.
Consistent disclosure requires coherent climate data, for the purpose of which common procurement was launched in 2021. The results of the procurement are expected in early 2022, to enable disclosure of the first reports in the first quarter of 2023.
The Bank of Finland has made carbon footprint calculations on its portfolios and used the PACTA (Paris Agreement Capital Transition Assessment) tool for conducting scenario analyses on its investment activities.
PACTA measures the alignment of climate portfolios with the Paris Agreement on Climate Change, and uses in the assessments Paris Agreement -aligned climate scenarios.
The carbon footprint and carbon-intensity calculations made in 2021 related to fixed-income and equity investments. A portfolio-level calculation was not performed on real estate investments.
The carbon footprint calculation covered 100% of government bonds, 98.9% of other direct fixed-income investments and 85.2% of equity investments. The calculation was performed by Institutional Shareholder Services (ISS ESG).
Emission results and analyses will be published once the Eurosystem has taken a decision on the reporting recommendations.
The Bank of Finland participated in 2021 in international working groups on climate risk indicators and climate-related disclosures
Bank of Finland experts worked in 2021 actively in international working groups for central banks (for example the Eurosystem and the Network for Greening the Financial System), which discussed in particular climate-related disclosure as well as the procurement and availability of climate data.
The working groups have, for example, prepared disclosure recommendations and climate risk indicators applicable for central banks.
In addition, Bank of Finland experts have given presentations on measures concerning the setting of climate targets, both at international and national events.
The Bank of Finland is a forerunner in climate targets among central banks
The Bank of Finland has set an ambitious goal, according to which its entire investment portfolio, excluding gold, for which an internationally accepted carbon footprint method does not yet exist, must achieve carbon-neutrality by 2050 at the latest.
The Bank of Finland is one of the first central banks to set such a comprehensive carbon-neutrality target for its investment portfolio. Achievement of the target depends on how governments succeed in the targets defined in the Paris Agreement on climate change, as due to the nature of central banking activities, the bulk of the Bank of Finland's reserves is invested in government bonds.
For the Bank's equity and corporate bond portfolios, it is possible to achieve the net-zero target even before 2050. Hence, the Bank has set a 50% emission intensity reduction target for equity investments by the end of 2025, compared with the level of Q1 2021.
The Bank of Finland restricts direct investments in individual companies whose turnover exceeds the thresholds on carbon, gas and oil business as follows:
- A maximum 2% of turnover from thermal coal
- A maximum 5% of turnover from the energy use of coal
- A maximum 10% of turnover from oil drilling
- A maximum 40% of turnover from gas production.
The restrictions will enter into force by the end of 2022, at which point restrictions will also be set on unconventional forms of oil and gas production, such as Arctic drilling and oil sands.
Intermediate targets have also been set for the carbon neutrality of the other asset classes. The intermediate targets and the next steps in the roadmap are described in a press release.
The Bank of Finland has made a global commitment to sustainability
The Bank of Finland signed the UN-backed Principles for Responsible Investment (PRI) among the first central banks, already in 2019.
Commitment to the principles is not only symbolic; the signatories are subject to minimum requirements, which the Bank of Finland already fulfils.
The Bank of Finland's own responsible investment principles recognise environmental, social and corporate governance (ESG) issues.
The Bank of Finland's responsible investment principles cover its entire investment assets, whereas the minimum requirement laid down in the UN-backed Principles for Responsible Investment is over 50% of investment assets.
The minimum requirement in the UN-backed Principles for Responsible Investment is that responsible investment activities are supervised by management and that either internal or external resources are allocated for the practical implementation of the principles.
At the Bank of Finland, responsible investment activities are monitored by the Board and staff resources are available for the practical implementation of the principles.
The signatories to the UN-backed Principles for Responsible Investment also commit to reporting through the PRI reporting framework.
The Bank is also a member of the international climate network NGFS (Network of Central Banks and Supervisors for Greening the Financial System). The purpose of the network is to contribute to the sustainability of central banking activities.
The Bank is furthermore a member of the Finnish organisation Finsif ry (Finland's Sustainable Investment Forum), which promotes sustainable investment.