Dutch central bank surveys pension funds, banks and insurers on climate risks

Quantitative and qualitative look at investor exposure to carbon intensive sectors

Dutch central bank DNB has sent out a survey on climate risk to a range of financials institutions, including pension funds, banks and insurers to inform a report it plans for later in the year that will assess climate risks, both physical and transition risk, for the financial sector.

It follows its analysis last year, a first for the country and globally, that found that, collectively, Dutch financial institutions had significant exposures to carbon intensive sectors. For pension funds this amounted to around 10% of their balance sheets.

Its survey this year will be again quantitative, but for the first time also qualitative. It will focus on questions related to exposure to carbon intensive sectors and risks related to the energy transition, as well as on risks related to climate and climate change. Institutions are being asked for their views on the topic.

Speaking to RI, Maarten Vleeschhouwer, Deputy Programme lead on DNB’s climate work and secretary of the bank’s Platform for Sustainable Finance, said other work it planned including stress testing and scenario planning, and gauging how the energy transition could impact the Dutch economy.

It comes as the DNB – which is also the Dutch pension regulator – hosted its second meeting of its Platform for Sustainable Finance this month. It’s an initiative in which different stakeholders in the Dutch financial sector work on climate change and sustainability.

The platform includes the Financial Market Authority (AFM), the Ministry of Finance, the Ministry of Infrastructure and the Environment, and the trade associations of the banks, insurers, pension funds and asset managers.

Individual financial institutions are represented by their relevant associations, but they can set-up working groups to feed into its work. The working groups presented to the platform earlier this month.

ASN Bank is leading a working group built on an existing platform called Carbon Accounting Financials (link).

Vleeschhouwer said: “They were founded before our platform and over time it made sense that they would also become a working group. But they are very independent. It’s a group of 11 financial institutions [including PME, PGGM, APG and the FMO] that have been working on trying to come up with a uniform methodology for carbon accounting.”

Their initial focus has been sovereign bonds, mortgages, project finance and listed equities. They are set to publish an interim report on their methodology and open it up for consultation within the Netherlands later this month.

The platform also has a working group on SDG (Sustainable Development Goals) impact measurement, that is led by PGGM.

Vleeschhouwer explains that so far they’ve come up with indicators on 11 of the 17 SDGs. “It’s mostly focused on indicators you can try and measure per product or per service, such as renewable energy produced or SME lending.”The plan is to further develop the indicators in the coming months and have the indicators tested with corporates Philips and Unilever, he says. Outreach activities are also planned for May.

DNB itself is leading a working group on potential regulatory barriers. Vleeschhouwer said that, after talking to a range of financial institutions, it found “there are different ways of doing sustainable investment”.

“There is a ‘light green’ way of doing things, which might be where you pick the most sustainable companies within a not necessarily ‘green’ sector. And then there is the more dark green investments, which are usually investments in innovative green companies or technologies.

“What you find is that for some sustainable investments it is sometimes not attractive enough yet for financial institutions to invest in. The risk/return profile is not attractive enough yet and what we found is that there are not necessarily any regulatory barriers.

“The regulatory framework should reflect risks that you take whether it’s green or brown. Now if there are some sustainable investments that have too high a risk or too low a return it is not a question of adjusting the regulatory framework but improving the risk / return profile of those investments, for example by pricing negative externalities or considering risk-sharing schemes.”

The DNB plans to issue a draft report for consultation within its platform. “For now the main finding is that if there is a lack of investments in certain sustainable projects it’s usually due to the fact that they are not attractive enough for financial institutions and that is not related to the regulatory framework but to other factors.”

Another working group on education and communication on sustainability led by ABP and APG has set up a three-day course on sustainability with Nyenrode Business University for executive and board level finance professionals.

And a working group on climate risk, led by MN, is engaging with the Financial Stability Board’s Taskforce on Climate-Related Financial Disclosure consultation. Separately, it has hosted an informal workshop with DNB on the practical implementation of managing and measuring climate risks with a view to do a report.

Separate from the individual working groups, the Dutch Ministry of Environment and Infrastructure presented about its national energy and climate plan, a requirement of European Union members. It asked for input from the financial sector on its work, which will include energy transition paths.

In related news, the Dutch pension sector has announced plans to draw up a covenant on ESG matters. It follows similar covenants from the Dutch textile and banking sector on human rights. Vleeschhouwer said the Dutch insurance sector also had a similar covenant in the works.