Responsible investment goes macroprudential as Dutch central bank to use ESG to select managers

Today’s announcement that De Nederlandsche Bank, the Dutch central bank, has signed up to the Principles for Responsible Investment – first reported by RI back in November last year – also means that it will apply ESG criteria to select its external managers and screen potential counter-parties for ESG.

The move coincides with a ground-breaking announcement from the Banque de France, its fellow member of the ‘Eurosystem’ network, that we are reporting here. Taken together, it is the clearest evidence yet that the macro-prudential community now “gets” sustainable investment.

There’s been a sea-change in the attitude of central banks towards responsible investment, initially sparked by Bank of England Governor Mark Carney and which has led to the formation of the Central Banks and Supervisors Network for Greening the Financial System (NGFS), which the DNB chairs. This has now culminated in substantive commitments from the French and Dutch central banks.

The DNB said: “As the first central bank to be a signatory to the Principles for Responsible Investment, DNB hopes to set a good example and to encourage more financial institutions to adopt sustainable investment practices.” The DNB manages over €38bn — making it one of the larger asset managers in the Netherlands.

Its reserves include an internally run portfolio of government paper and semi-government paper and an externally managed corporate bond and equity portfolio.

As it says in its new eight-page responsible investment charter, it believes that return targets should “go hand in hand” with responsible investment practices.

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.

DNB’s new charter outlines a five-step ESG responsible investment policy:

1. Screen: DNB will screen the investment universe and its potential counterparties on ESG criteria.
2. Integrate: DNB will integrate ESG criteria in its investment processes.
3. Promote: DNB will promote green finance and responsible investing.
4. Report: DNB will report on its responsible investment approach.
5. Develop: DNB will further develop its responsible investment approach

It will screen against a series of international standards on cluster munitions, anti-personnel mines etc and against the UN Global Compact. On top of this, an ad hoc Responsible Investment Committee will be created to review “red flag” events.For its externally managed assets, DNB expects its managers have a policy that defines the appropriate actions – whether exclusion or engagement – in case of a violation of ethical standards.

It will integrate ESG into its internally and externally managed assets and “will consider the use of external data sources”.

“Responsible investment strategies for central banks are not significantly different from those of any other asset owner.”

Not only that, but ESG criteria will be “included in the selection, appointment and monitoring of external managers”.

“All managers are required to be a signatory of the PRI,” it says. The names of its external managers are not disclosed.

“Furthermore, DNB expects its external managers to incorporate ESG criteria in the fundamental financial analysis of companies they invest in and to vote and engage on ESG related issues.”

The new initiative does not cover the DNB pension fund, which is separately managed and which signed up to the PRI in 2011. Monetary operations are out of scope of the charter.

“Using a sustainability lens, central banks can more clearly identify material financial risks and harness the opportunities of more stable, sustainable markets,” said the PRI’s Head of Benelux, Don Gerritsen, citing market stability, management of government reserves and global collaboration.

“Responsible investment strategies for central banks are not significantly different from those of any other asset owner.”

Demonstrating its commitment, the Banque de France has acted as the secretariat for the Network for Green the Financial System (NGFS).

The bank has also been increasing its support for research on green finance via partnerships with French universities, research centres and think tanks.

The first report of the NGFS will be published on April 17, coinciding with an international conference in Paris on the subject. The report will contain recommendations for good practice by central banks to green the financial system.

In addition, France’s financial stability and protection supervisor, The Autorité de Contrôle Prudentiel et de Résolution (ACPR), has been putting the finishing touches to its work on the application to banks and insurers of the country’s Article 173 regulation on the energy transition and green growth. It will constitute the first step in what is being termed sustainability ‘stress tests’ for the French financial system.