Dutch central bank to sign up to Principles for Responsible Investment

Central bank aims to become PRI signatory next year as policymakers target climate risks

De Nederlandsche Bank (DNB), the Dutch central bank, says it intends to join the PRI in February in the latest signal of the increasing importance of sustainable investment at central banks.

The DNB’s pension fund signed up in 2011, although it is managed separately from the bank, with an independent foundation and board.

A spokeswoman for the DNB said signing up to the PRI, the Principles for Responsible Investment, next year will concern the DNB’s own investments and reserves.

Norges Bank Investment Management, the asset management arm of Norway’s central bank, has been a signatory to the PRI since 2006.

DNB – which is also the Dutch pension regulator – has been active on the issue of climate risk, convening the Dutch financial sector on the issue under its Platform for Sustainable Finance.

Recently, the Dutch branch of the CFA Society hosted an event where Ortec Finance said the coverage ratios of pension funds could drop by up to 80% if global temperatures rise by 4%, according to a new model for asset-liability management.

Last month the DNB published the results of a stress-test gauging the domestic effects of a disruptive energy transition – believed to be the first of its kind conducted by a central bank.

And the DNB is a member of the Network for Greening the Financial System (NGFS), a new network formed to help strengthen the global response to the Paris climate accord and to help the financial system become more environmentally friendly.

It has 15 members including the Bank of England, Banque de France, Reserve Bank of Australia, People’s Bank of China, European Central Bank (ECB) and Germany’s Bundesbank. It released its first progress report last month.

Last week, the NGFS and the Bundesbank held an event in Berlin on the role of central banks of scaling up green finance with the Council on Economic Policies think tank.

At the event, the European Central Bank – which said recently that climate is a key risk for banks – expanded on this topic with a keynote speech.

Executive Board member Benoit Cœuré said all authorities, including the ECB, needed to reflect on and consider the appropriate response to climate change.

“Climate change can be expected to affect monetary policy one way or the other,” said Cœuré. “That is, if left unchecked, it may further complicate the correct identification of shocks relevant for the medium-term inflation outlook.

“It may increase the likelihood of extreme events and hence erode central banks’ conventional policy space more often, and it may raise the number of occasions on which central banks face a trade-off forcing them to prioritise stable prices over output.”
Cœuré, who last year met Amundi and HSBC on portfolio decarbonisation, added that if humanity succeeded in accelerating the transition to low-carbon economies, the consequent disruption would also affect monetary policy.Cœuré said this demonstrated that the “implications for the conduct for monetary policy could be substantial”.

“I would argue that the ECB, acting within its mandate, can – and should – actively support the transition to a low carbon economy, in two main ways: first, by helping to define the rules of the game and, second, by acting accordingly, without prejudice to price stability.”

Cœuré also said that the ECB should incorporate best practice on sustainable finance into its own activities.

He said the ECB already delegated proxy voting for equity investments to PRI signatories with ESG requirements. And for its own funds portfolio, the ECB had started looking at how to implement ESG criteria.

This year, the Banque de France became one of the first central banks to implement a responsible investment policy for its own funds – some €20bn of assets managed for its retirement fund and its internal treasury funds.

Going further, Ivan Odonnat, Deputy Director General for Financial Stability and Operations at the Banque de France, announced at the event that it would start to report alongside the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD) after an audience member asked central banks why they didn’t do so yet.

Odonnat would not go into specifics, but said it would mostly likely start on its responsible investment policy. “Monetary policy is a broader framework to discuss with Eurozone colleagues,” he said.

A representative from the Bank of England, whose governor Mark Carney helped catalyse the TCFD through the Financial Stability Board, said it was a private sector initiative, not relevant to central banks.

But, Tanveer Hussain, Head of Peer Supervision & Risks Division at the Prudential Regulation Authority at the Bank of England, said the question on the TCFD was valid, which the NGFS would talk about.

The Bank of England came under political criticism earlier this year for not adopting the TCFD.

Bundesbank Executive Board Member Joachim Wuermeling said the bank would be publishing a report next year looking at climate risk and the German financial sector.

Opening the event, his fellow Executive Board Member Sabine Mauderer, said: “Central banks are reluctant to admit it but we know central banks have an extraordinary power to move markets in certain directions, including green finance… there is no doubt asset purchasing has been a powerful market driver in recent years… it gives a quality label and signalling effect for other investors to get involved as well.”

The ECB, and other central banks, have come under fire for their asset purchasing programmes which some say have been skewed to fossil fuel sectors.

Addressing this point, Cœuré said: “Our portfolio is composed of the most liquid and creditworthy fixed income assets in a few major currencies, leaving little room for climate-related objectives.”