Bundesbank says it is reviewing sustainability of own funds portfolio

It is vital to extend the “observation horizon” of climate risk says Mauderer

The German central bank, the Bundesbank, says it is reviewing the sustainability of its euro-denominated own funds portfolio – while its president says he opposes using monetary policy to fight climate change.

“At the Bundesbank, we are currently reviewing how sustainable our euro-denominated own funds portfolio already is and where there is still room for improvement,” said Bundesbank Executive Board Member Sabine Mauderer at a climate change event organised by the bank in Frankfurt today.

“Right now,” she said, “this portfolio is worth around €12 billion and is invested exclusively in fixed-interest covered bonds denominated in euro.

“Besides this, in its role as a fiscal agent, the Bundesbank holds portfolios for external public sector clients such as central government and a number of federal state governments, which involves managing amounts in the high two-digit billions. Four of the 16 portfolios already follow an ESG approach or are invested in green bonds.

“So all in all, we’re talking about a figure in the high single-digit billions. What’s more, four federal states – Hesse, Baden-Württemberg, North Rhine-Westphalia and Brandenburg – have recently followed Berlin’s lead and commissioned tailored sustainability indices as a benchmark. This involves assessing enterprises according to ESG criteria; the Bundesbank can apply the resulting benchmark to the portfolios of the federal states.”

It was “vital” to extend the “observation horizon” with climate risk, she said in a speech entitled “Central banks – a crisis manager for the climate?”“The search for yield is sometimes focused on the short term. Climate risk, on the other hand, is of a more medium to long-term nature. It has to form part of the analysis – chiefly because some of the consequences of climate changes are irreversible.” The International Monetary Fund, Mauderer said, is “losing no time in preparing to incorporate climate risk into its country analyses”.

Meanwhile the Bundesbank’s President, Jens Weidmann, has been quoted by the Financial Times as saying at the event that he opposes using monetary policy to fight climate change – which it said sets up a “potential clash” with incoming European Central Bank President Christine Lagarde.

It comes as former Irish Central Bank Governor and ex-ECB Governing Council member Patrick Honohan has entered the debate about the potential role of monetary policy in tackling inequality and climate change in a working paper for the Peterson Institute for International Economics.

He argues that most central banks have an “explicit secondary mandate” – in addition to price stability etc. – “to use their power to support wider goals of economic policy”.

He goes on to say: “But as central banks and financial regulators are encouraging private financial institutions to go beyond conventional risk assessments in assessing the financial risks of exposure to climate-sensitive firms, should this not also, at the very least, have been applied to their own asset purchases?”

But central bankers “would do well to avoid rhetorical gesturing that conceals mere lip service and greenwashing”.