Basel Committee joins NGFS green network amid patchy central bank ESG take-up

European central banks remain in the spotlight over climate risk

The Basel Committee on Banking Supervision, the primary global standard-setter for the prudential regulation of banks, has signed up to the Network on Greening the Financial System (NGFS), in the latest signal that banks around the world are set for stronger regulation on climate risk.

The Committee, which has 45 members from 28 jurisdictions and describes its mandate as “strengthening the regulate, supervision and practices of banks worldwide with the purpose of enhancing financial stability”, has joined the network as an observer.

In an update circulated yesterday, it said “the committee also took note of the first comprehensive report by the NGFS and discussed the implications of the report’s recommendations for the Committee’s future work”.

The report’s recommendations, issued in the spring, include integrating sustainability factors in portfolio management, building awareness and knowledge, bolstering climate disclosure and supporting the development of green definitions.

The Basel Committee is hosted by the Bank of International Settlements, which is based in Switzerland – but it appears the enthusiasm for the NGFS recommendations may not have spread to that country’s own central bank.

The Swiss National Bank (SNB) is being accused of ‘greenwashing’ by campaigners because of its resistance to taking action on climate change, even though it is a member of the NGFS.

The bank, which was classified as the eighth largest asset owner in the world in 2017, has found itself under fire in recent weeks following a speech by SNB’s Director Andréa Maechler at a sustainable finance conference in Geneva, in which she is reported to have said that introducing climate-related limitations in its investment strategy would cost “billions”.

“The Swiss people must understand that if we restrict our room for manoeuvre, there is a real cost, which is not counted in millions, but in billions,” she was quoted saying.

The comments have attracted criticism from campaigners, who have been locking horns with the SNB for a number of years over its climate policy. A report, based on research by ISS-Ethix and 2° Investing Initiative, was published last year by Swiss campaign group Artisans de la Transition, claiming that “the known portion of the Swiss National Bank’s equity portfolio ($95.6bn, 92bn Swiss francs, representing 60% of the bank’s equity investments) was the source of 48.5m tons of CO2 in 2017. That is more than the total emissions attributable to Switzerland in 2016 (48.3m tons), the last available data”.

In December, a Bill was proposed by the Green Party in the Swiss parliament, to force the SNB to divest fossil fuels, but was rejected.

Since then, the bank has become a member of NGFS, which includes leaders in sustainable finance like the Bank of England, the Netherlands’ DNB and the Banque de France – all of whom have taken concrete action to raise awareness of climate risk in economies and investment and lending portfolios.

Shortly after the Swiss bank joining, the network launched its recommendations.

When RI asked the SNB how it reconciled Maechler’s recent comments with joining the NGFS, the bank declined to comment, but said that joining the network would allow it to “compare notes and best practice” with peers, in the hope of “better understanding the impact of climate risks on macroeconomics and financial stability”.

It added: “The SNB takes the issue of climate change seriously and has long been engaged in avoiding, reducing, substituting and/or offsetting its CO2 emissions at operational level. The National Bank has been committed to environmental management for more than 20 years.”The remarks were slammed by campaigners. Sandro Leuenberger from Swiss climate NGO Klima-Allianz Schweiz said the central bank was “practicing greenwashing when it holds up self-evident measures in its own buildings and operations as a contribution for climate protection”.

The SNB also said it “takes environmental issues into account when investing its currency reserves, which are fundamentally at the service of monetary policy”. “Among other things, in its equity investments it excludes shares in companies that systematically cause severe environmental damage,” a spokesman added.

Leuenberger said it was unacceptable that SNB “severely disregarding its own exclusion rules” when it came to taking environmental issues into consideration.

“Switzerland is a big financial centre, and the SNB has a particularly important role in sending out signals to the market on climate change,” he added. “The views expressed by the bank are simply not aligned with the recent recommendations of the NGFS, of which it is now a member.”

The NGFS declined to comment on whether the SNB’s comments were aligned with its mission.

Meanwhile, the Italian central bank has been steaming ahead on sustainability, establishing itself as an unlikely leader on ESG. Although Italy is generally regarded as a laggard on climate finance, the central bank is in the process of completing ESG integration in its €8bn equity holdings – around 6% of its total €-denominated investments – and will begin looking to do the same for its corporate bond portfolio.

In a six-page speech on the role of central banks on climate change and sustainable finance last month, Ignazio Visco, the Governor of the Bank of Italy, described sustainability as “generally neglected in the decision-making process of the administrative bodies and in financial risk management systems”.

“Efforts should therefore be intensified by all, to increase attention on these issues”.

He pointed out that figures show that climate change is set to affect Italy in particular, because of its geography, and that “these changes pose new risks for the real economy and for the stability of the financial sector”.

Central banks can encourage data sharing, harmonised approaches to climate analysis and collaboration among stakeholders, he continued. “They aim to set an example for all investors through their management policies of financial resources and related risks.”

As a result, the Bank of Italy has spent the first half of 2019 working on an approach for its own equities, which includes excluding investments in non-UN Global Compact-compliant firms, and prioritising those with better ESG profiles. An undisclosed provider has been selected to provide analysis on the latter.

The portfolio includes around 140 firms in the Eurozone and Italy. The result of the new strategy is a GHG emissions reduction of 23%, a reduction in energy consumption of 30% and a reduction in water consumption of 17%.

“This approach offers the best combination of risk-return and the highest protection against particularly adverse market trends,” Visco claimed, adding that the bank would roll it out to other asset classes, starting with corporate bonds.

He hoped the bank’s activities could “serve as a reference for other investors”.

A spokeswoman for the bank confirmed that the integration process would be completed by the end of the June, and told RI: “It is important to highlight that the ESG investment criteria are not applied to operations or investments connected with institutional activities, such as the monetary policy. Also the bank’s employees’ pension fund is out of the application of the ESG criteria.”