Finnish central bank applies responsible investment standards to assets and speaks of ‘climate debt’

Fossil fuel subsidies should be axed, says Governor Olli Rehn

Finland’s central bank has said it has applied new “responsible investment standards” to its own assets, adding to growing momentum around the role of central banks globally on sustainability and climate risk.

The Bank of Finland’s recently-appointed Governor, Olli Rehn, gave a speech in his role as Deputy Governor last month (published this week) at the Finnish Climate Summit, telling the audience: “We want to play our part too”. As a result, he said, the bank had “recently decided to apply responsible investment standards to the management of our investment portfolio”.

Rehn is a former Finnish economy minister who was European Commissioner for Economic and Monetary Affairs from 2010-2014.

The Bank of Finland, which has some €10bn of investment reserves, implemented its latest responsible investment strategy earlier this year, and told RI it would continue to evaluate it “on a regular basis”.

The strategy applies to all asset classes, and in a recent blog, the Bank’s Head of Investments, Jarno Ilves, wrote that it invested in green bonds, “but hopes, and expects, that the market would be more transparent and follow a universally agreed set of standards”.

“While green bonds, social bonds and development bank bonds are considered as responsible investments by design, investments in covered and corporate bonds must meet the Bank’s responsible investment criteria in which issuers are required to comply with the UN Global Compact.”

In its most recent Annual Report, it made the distinction between responsible investment in in-house investments, and in those that are outsourced to third parties.

“The responsibility strategy for direct investments relies on the exclusion method, meaning that an internationally renowned service provider goes through and analyses the Bank of Finland’s potential investment instruments, giving its view as to which of them do not meet the responsibility criteria”, it explained. “Following the service provider’s analysis, the Bank of Finland makes the final decision on instruments that will not be invested in.”

“The responsibility strategy of indirect investments is based on positive impact, meaning that the Bank will only invest in funds managed by asset managers that are clearly and transparently committed to responsibility principles.Being large investors, the asset managers are expected to use their influence on the companies directly to sort out any responsibility issues.”

In March, RI reported that Banque de France was introducing a responsible investment policy for €20bn of assets managed for its pension (€13.5bn) and internal treasury funds (€6.5bn).

The Bank of Finland has also joined the Central Banks and Supervisors Network for Greening the Financial System – an influential group co-founded by the Bank of England, whose most recent new members include the European Central Bank. (See separate story on the NGFS)

Rehn also used the speech to “call on both private companies and public institutions to work for sustainable development – and for sustainable finance – with the economically and socially effective means at their disposal”, adding that the financing gap for tackling climate change grows every year.

“Let’s call this the climate debt. And it needs to be paid back at some point. For us not to become over-indebted, we urgently need to start filling the gap.”

However, he issued a warning to the European Commission in relation to its proposals for a ‘Green Supporting Factor’ – lower capital requirements for banks lending to eligible green projects.

“Green investments are not without normal financial risks either, and these risks cannot be disregarded without jeopardising financial stability. The previous financial crisis pushed climate policy discussions into the political background for a decade. Let’s not repeat that.”

He highlighted the EU’s work on credit ratings and benchmarks too, saying sustainability considerations should be “better reflected” in these mechanisms, but regulatory changes should be “justified from a prudential perspective”.

As a first step, though, Rehn said fossil fuel subsidies should be axed. “No longer should the polluting companies freeride on the backs of others – we need to move towards the principle of ‘the polluter pays’,” he told the room.

Then the EU Emissions Trading System should be “fixed”, or a global carbon tax should be introduced, he continued. Finally, there should be more uptake of the TCFD recommendations in corporate reporting.