Central banks are increasingly looking to align their operations with sustainability objectives within the constraints of their mandates. This agenda mainly originated in central banks within the broader remit of financial stability, in their capacity as supervisors. However, some central banks have also begun to explore and act on the sustainability implications for their identity as managers of investment portfolios, including sustainable and responsible investment of their pension and own portfolios. The drivers for doing so range from managing sustainability-related risks to aligning their activities with wider government policies and commitments, including with net-zero emissions targets. This challenges the conventional approach that calls for investments to be guided by the trinity of objectives of ‘liquidity, safety and return’, which overlooks the value of an environmental, social and governance (ESG) approach as a means to identify risks and opportunities.

Yet central banks’ progress on this agenda to date has been relatively muted compared with their peers from the wider public investor community such as pension funds and sovereign wealth funds. Only a few central banks are signatories to the UN-supported Principles for Responsible Investment, have climate-related targets, or have made their responsible investment principles public. Low rates of adoption may be due to challenges relating to the availability of data, information and resources, to the particular characteristics of a typical central bank portfolio, or to issues of institutional independence and mandates.

Central banks can learn from their peers from the central banking community that are more advanced in this process, as well as from the wider public investor community in implementing sustainable and responsible investment through strategies including active ownership, ESG integration, impact investing, screening and thematic investing. This paper identifies a recommended course of action for central banks in sequence across the different phases from developing and implementing relevant policy, to monitoring and reporting outcomes, to identifying further adjustments to the policy and its implementation.

This paper is part of a toolbox designed to support central bankers and financial supervisors in calibrating monetary, prudential and other instruments in accordance with sustainability goals, as they address the ramifications of climate change and other environmental challenges. The papers have been written and peer-reviewed by leading experts from academia, think tanks and central banks and are based on cutting-edge research, drawing from best practice in central banking and supervision.