Management of financial assets in 2023

One of the statutory tasks of the Bank of Finland is the holding and management of foreign reserves. After a difficult year in 2022, the situation in the financial markets was more favourable for investment returns in 2023.

Managing the Bank of Finland’s financial assets

Financial markets returned to more normal market conditions in 2023

In 2023, the financial markets were characterised by more normal market conditions in terms of investment returns after a very challenging year in 2022.

The Bank of Finland’s financial assets yielded an overall return of EUR 586 million in 2023, in which the actual return on investment excluding the impact of exchange rate movements amounted to EUR 543 million.

The Bank of Finland’s financial assets consist of the balance sheet items which fall under the Bank’s investment activities. At the end of 2023, these assets totalled approximately EUR 13.4 billion.

The Bank’s financial assets do not include balance sheet items related to Eurosystem monetary policy measures, for example monetary policy bond purchase programmes or loans to banks.

The Bank of Finland decides on the volume of its financial assets within the framework of the Agreement on Net Financial Assets (ANFA).

ANFA is an agreement between the national central banks in the Eurosystem and the European Central Bank (ECB). It sets rules for the holdings of financial assets that are related to the domestic tasks of the Eurosystem central banks.

The Bank of Finland’s financial assets are managed in line with the central bank objectives, taking into account the returns on investment, the risks attached and the responsibility considerations.

Managing foreign reserves is among the Bank of Finland’s statutory tasks 

Holding and managing foreign reserves are among the statutory tasks of the Bank of Finland. The volume of the Bank of Finland’s foreign reserves and the currency composition is a strategic decision based on considerations of preparedness. Decisions related to the management of foreign reserves are taken by the Bank’s Board as and when necessary, and at least once every three years.

The currency-specific targets for the period 2022–2024 are set at USD 5 billion, GBP 650 million and JPY 95 billion.

The management of foreign reserves has a key role in the Bank of Finland’s endeavours to ensure that it is financially equipped to deal with future uncertainties and risks. Furthermore, the Bank of Finland makes provision for crises that could weaken Finland’s external solvency.

Financial assets and foreign reserves

Composition of Bank of Finland’s financial assets in 2023

At the end of 2023, the Bank of Finland’s financial assets amounted to around EUR 13.4 billion (Table 6).

The updated financial asset framework was adopted at the beginning of the year. Under the framework, the financial assets consist of foreign reserves, long-term investments and gold holdings.

The Bank’s foreign reserves comprise direct and indirect foreign currency-denominated fixed-income investments and items denominated in IMF Special Drawing Rights (SDRs).

The Bank of Finland’s gold holdings amounted to EUR 2.9 billion at the end of 2023. The Bank did not engage in active investment activity with gold holdings in 2023.

Bank of Finland’s policy on investment in financial assets is a strategic matter

The Bank of Finland’s asset investments are guided by the investment policy decided annually by the Bank’s Board. The investment policy covers fixed-income investments, long-term investment and the principles of responsible investment.

The fixed-income investment policy for foreign reserves sets a strategic allocation for the Bank’s fixed-income investments by asset class and determines an appropriate level of interest rate risk for the various currencies.

Long-term investment has a higher expected return and lower liquidity requirement than with other portfolios. The risk-return ratio improves for the balance sheet as a whole when the portfolio of investments is diversified.

The Bank of Finland updates the principles of responsible investment every year in connection with its investment policy, and at other times as necessary. In addition, the Bank of Finland’s Annual Report on Responsible Investment will be published on the Bank’s website during spring 2024.

The policy on investment in financial assets establishes a strategic market-based index for direct fixed-income investments that serves as a benchmark for the Bank’s investment activities.

The Bank’s Asset Management Division may deviate from the strategic index within a pre-set range and in accordance with the investment policy’s risk limits.

A long-term investment policy that takes account of balance sheet risks as a whole ensures that the balance sheet is healthy and promotes the Bank of Finland’s goal of a steady distribution of profit to the state budget without endangering capital adequacy.

Bank of Finland’s fixed-income investments in the foreign reserves portfolio in 2023

The Bank of Finland’s fixed-income investments in the foreign reserves portfolio (excluding items denominated in SDRs) were divided between sovereign bonds and central bank deposits (57.6%), supranational or government-related bonds (27.1%), covered bank bonds (4.7%), corporate bonds (10.0%) and cash instruments (0.6%).

Fund-based fixed-income investments worth EUR 257 million were invested in a green bond fund managed by the Bank for International Settlements (BIS).

As a measure of interest rate risk, the average duration, i.e. the average time to maturity, of the fixed-income portfolios at the end of 2023 was 2.3 years. Fixed-income investments are made in debt securities with high credit ratings.

Bank of Finland’s long-term investment in 2023

The Bank of Finland makes long-term investments in order to maintain the real value of on-balance sheet capital items deemed to be very long-term.

In 2023, the Bank’s long-term investments consisted of equity, real estate, fixed-income and cash investments. The value of the long-term portfolio at the end of the year totalled EUR 3,553 million.

Equity investments were made in index funds that mirror the global index for developed markets and which take account of sustainability and climate issues by means of passive exchange traded funds (ETFs).

Real estate investments are diversified across a number of unlisted European real estate funds. Each of the funds owns real estate in desirable locations, which makes the properties easy to let.

Returns and risks of Bank of Finland’s financial assets in 2023

The return on the Bank of Finland’s financial assets rose substantially on the previous year (4.5%, compared with -0.2% in 2022). 

Market interest rates rose during the first half of the year and, although the regional banking crisis in the United States in March temporarily increased uncertainty, interest rates continued to rise as autumn approached, when the main focus of the markets turned towards the inflation path and central banks’ monetary policy.

During the autumn, the economic data showed signs of softening and inflation fell, causing market interest rates to decline towards the end of the year.

The Bank of Finland’s financial assets yielded an overall return of 4.5%, or EUR 585.8 million, in 2023. The actual return on investment, excluding the impact of exchange rate movements, gold holdings and items denominated in SDRs, was 5.8%, or EUR 543.2 million.

The yield on the fixed-income investments in the Bank of Finland’s foreign reserves portfolio was EUR 238.0 million, of which the majority, or EUR 204.6 million, was from investments denominated in US dollars. The return on sterling-denominated fixed-income investments stood at EUR 33.3 million and the return on fixed-income investments denominated in Japanese yen was slightly negative, at EUR -0.5 million.

The decline in market interest rates towards the end of the year also supported the equity market. This ensured that 2023 as a whole was a strong year on the equity market. Global equity prices rose by around 20% during the year, driven by the United States and major technology companies. The return on the equity investments in the Bank of Finland’s long-term portfolio in 2023 was 20.2%, or EUR 260.1 million.

Real estate investment performed weakly throughout the year. The rise in interest rates and the weakening economic outlook in Europe pushed the valuations of real estate investments down.

This was evident in the real estate investments of the Bank of Finland’s long-term portfolio, the returns of which were clearly in negative territory in 2023 at -11.6%, or EUR -19.0 million.

The Bank’s real estate investments were in unlisted real estate funds investing in the lowest risk section of the market, i.e. core funds. The change in their values lags behind the market for listed real estate funds, and so the 2023 returns were also a reflection of the difficult market conditions the previous year.

The Bank of Finland’s financial assets diminished in euro terms due to exchange rate movements arising from a weakening of the US dollar and Japanese yen against the euro.

The weakening of the dollar caused a revaluation loss of EUR -152.8 million and that of the yen a revaluation loss of EUR -88.2 million during 2023. By contrast, the strengthening of the pound sterling resulted in a revaluation gain of EUR 24.2 million, and the rise in the price of gold also raised the euro-denominated value of the financial assets by EUR 255.0 million in total.

The total market risk associated with the Bank’s financial assets (Value-at-Risk 99%, 1 day) varied between EUR 66 million and EUR 186 million in 2023 (Chart 22).

Exchange rate risk is the Bank of Finland’s most significant risk associated with its foreign currency-denominated fixed-income investment portfolios. The volume of the Bank’s foreign reserves has been scaled to the level required for the functions of a central bank.

Share of the European Central Bank’s foreign reserves in 2023

The European Central Bank has foreign reserves of its own. Management of the foreign reserves of the ECB is distributed among the national central banks in the Eurosystem according to their respective capital keys.

The Bank of Finland manages part of the ECB’s foreign reserves together with the Estonian central bank, Eesti Pank. In the management of the ECB’s foreign reserves, the emphasis is on security and liquidity, as the key purpose of the reserves is to ensure the availability of sufficient resources for the Eurosystem’s foreign exchange operations.

The value of Finland and Estonia’s pooled US dollar-denominated portfolio of ECB foreign reserves at the end of 2023 stood at EUR 1,175 million. For additional information on the management of the ECB’s foreign reserves, see the ECB Annual Report.

Responsible investment and climate reporting in 2023

Responsibility is one of the factors guiding the Bank of Finland’s investment decisions

The core principles and objectives of central banks’ investment operations are typically safety, liquidity and return.

At the Bank of Finland, responsibility has been added alongside these as a fourth objective guiding investment decisions and as an integral part of daily investment activity.

The Bank of Finland’s investment assets were managed in accordance with the principles of responsible investment during 2023.

The Bank of Finland has set a carbon neutrality target for its entire investment portfolio, which it aims to achieve by 2050 at the latest. In order to meet the target, qualitative and quantitative interim climate targets have been set for the individual components of the investment portfolio. In 2023, the investment portfolio components were in line with the interim targets set for 2025.

Achieving the carbon neutrality target for the entire investment portfolio depends primarily on how governments succeed in reaching the targets of the Paris Agreement, because a significant portion of the Bank of Finland’s investment assets is invested in sovereign bonds, due to its functions as a central bank. In the case of equity and corporate bond investments, it is possible to reach the carbon neutrality target even before 2050.

The Bank of Finland’s investment operations were developed and implemented in accordance with the UN-endorsed Principles for Responsible Investment, which the Bank signed in 2019.

The Bank of Finland was given high ratings for its implementation of responsible investment in the PRI Assessment Report for 2022 that was released at the end of 2023.

Climate-related key figures for the Bank of Finland’s investment activities

In April 2023, the Bank of Finland published for the first time an Annual Report on Responsible Investment, covering 2022. The report covers all of the Bank’s investment activities, and includes a climate report on financial assets and climate-related key figures by asset class in accordance with the Eurosystem’s common stance on climate-related disclosures. The Annual Report on Responsible Investment and the climate-related key figures for 2023 will be published on the Bank of Finland website during spring 2024. This will include the calculation formulae for the climate-related key figures, information on the elements exceeding the Eurosystem’s minimum requirements, and forward-looking key figures.

The most significant emissions in the Bank of Finland’s investment activity are associated with government bonds. The Bank holds these in its portfolio because of its central bank functions, among other reasons (Table 8).

Carbon footprint of equity investments in 2023 decreased as planned and is on course to meet interim target set for 2025

In equity investment, progress was made – continuing from 2022 – towards reaching the interim target set for 2025 of reducing by half the weighted average carbon intensity (WACI) of equity investment from the 2021 baseline figure (Table 9).

Although no further investments were made in climate or ESG funds in 2023, the weighted average carbon intensity of the equity allocation was improved at the end of 2023 by reducing exposures to index funds that track the global indices of developed countries, in order to adjust the overall allocation of the long-term investment portfolio.