Sustainable management of central banks’ foreign exchange (FX) reserves

Central banks are playing an increasingly active role in promoting the move towards a sustainable global economy. One key motivation is the need to mobilise funds for the large-scale public sector investment required to reach the goals of the Paris Agreement on climate change. This paper explores the role central banks’ foreign exchange (FX) reserves portfolios can play in this context. Central banks’ frameworks for managing FX reserves have traditionally balanced a triad of objectives: liquidity, safety and return. Incorporating sustainability requires expanding this usual triad into a tetrad. This can be achieved either explicitly, by introducing new economic uses of reserves, or implicitly, by recognising the ways in which sustainability affects existing policy objectives – or through a combination of both approaches. Pursuing sustainability, however, may give rise to trade-offs over and above the usual tensions between liquidity and safety and return. This paper explores sustainability-enhanced reserve management in the context of these trade-offs and outlines 12 different channels (classified into four different types) that reserve managers can use to ‘green’ their operations. Each of these channels comes with its own advantages and limitations, so – given the constraints faced at the individual reserve manager’s level – choosing the right channels is key

Sustainable and responsible management of central banks’ pension and own portfolios

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.

The Effects of Mandatory ESG Disclosure around the World

10 December: We examine the effects of mandatory ESG disclosure around the world using a novel dataset. Mandatory ESG disclosure increases the availability and quality of ESG reporting, especially among firms with low ESG performance. Mandatory ESG reporting helps to improve a firm’s financial information environment: analysts’ earnings forecasts become more accurate and less dispersed after ESG disclosure becomes mandatory. On the real side, negative ESG incidents become less likely, and stock price crash risk declines after mandatory ESG disclosure is enacted. These findings suggest that mandatory ESG disclosure has beneficial informational and real effects.

Working Group on Banking Supervision and Sustainable Development in the Americas

Banking regulations are known to have substantial leverage on the real economy for the simple reason that finance permeates everywhere. By the same token, they are a suitable instrument for improving the preparedness of the real economy for climate change. We convene a working group of prominent practitioners from among the collectivity of bank supervisors and regulators in the Americas, along with recognised experts in the field in order to review the state of practice regarding the incorporation of climate change into micro prudential regulatory frameworks.

For purposes of ordering the discussion, existing and potential practices will be grouped into four categories:

  • Those where the authorities provide finance by instruction.
  • Those where the authorities provide incentives for desired types of finance.
  • Those where the authorities reduce financial risk by socialising potential losses by means of insurance, direct payments, or exceptional access to citizens’ own assets.
  • Those where systems are set up to prevent, contain, and abate negative externalities.

To assist the working group’s deliberations, we will provide reference documents on existing practices, as well as on plausible modifications in existing regulations that can have important positive impacts for climate change and adaptation. The working group will also be asked to discuss the feasibility of specific innovations for making regulations more climate-friendly, and to review potential obstacles, barriers, and resistance to the implementation of such potential change. The document emerging from the working group’s deliberations will provide policy recommendations and, where appropriate, a further research agenda.

Working Group members:

Management of Climate Risks in the Financial Industry of a Resource Based Economy: A Canadian Scenario Analysis

Although some studies exist on how the financial industry is affected by climate risks and how it might manage them, no such studies exist for a country with an economy that is mainly based on carbon-intensive resources, such as oil, gas, and mining. We conduct a scenario analysis based on an impact matrix that uses both physical and transition risks to model impacts on the financial portfolio of Canadian chartered banks. We will complement findings about climate-related risks and opportunities in Europe, Asia, and Africa that are different from climate change-related risks to North America and that are in countries with different regulatory frameworks.

Our research will be based on a formative scenario analysis and an impact matrix will be created based on the Intergovernmental Panel on Climate Change climate scenarios and climate scenarios for Canada. Based on different data sources, we will conduct a MICMAC analysis (a system of multiplication of matrices applied to the impact matrix) to calculate both direct and indirect impacts on Canadian banks’ financial risks. The expected results will help policymakers in countries with carbon-intensive economies to create financial policies, regulations, and supervision regimes that could be applied by central banks and other financial regulators to mitigate climate risk for the financial industry without creating otherwise significant negative impacts for these countries’ economies.

The results of this INSPIRE research will help banks to implement strategies to reduce their exposure to climate-related financial risks. Consequently, negative impacts on the Canadian financial industry could be avoided. This is important given that the Canadian banking sector is dominated by five chartered banks that are similar with regard to their businesses.

The Effects of Mandatory Environmental, Social and Governance (ESG) Disclosure Around the World

In recent years, due to the dramatic increase in demand for ESG information to prompt sustainable growth, many countries and jurisdictions have issued regulations that mandate firms and financial institutions disclose their ESG situations and activities. But what are the real impacts of such mandatory ESG disclosure regulations on financial markets? We address this question by examining the financial stability of firms in 44 countries around the world over a sample period of 2000 to 2017.

To assess the stability of a firm, we measure the volatility of equity return and the likelihood of stock price crashes. Using multivariate regressions, we find equity return volatility is lower after mandatory ESG disclosure, and within this, systematic and idiosyncratic volatility are also significantly lower. We find stock price crash risk declines after the enforcement of mandatory ESG disclosure.

Our findings support calls for mandatory introduction of ESG disclosure requirements. In particular, stock exchanges should increase their ESG disclosure policies, as we show that mandatory disclosure improves the information environment. Moreover, our findings on financial stability are of interest to central banks and the enactment of mandatory ESG disclosure enhances the stability of the financial market by improving the ESG informational environment.

Environmental and Social Risk Management in Brazilian Banking: From an Environmental and Social Management Structure to Climate Scenario Analysis Development

The Central Bank of Brazil is taking encouraging steps for greening the country’s financial system. In 2014, the Brazilian National Monetary Council issued Resolution 4327, a principle-based resolution that required all Brazilian financial institutions to develop an Environment and Sustainability (E&S) management system with a comprehensive scope.

Three years later, Resolution 4557 was published, requiring risk management and structure for capital management of Brazil’s financial institutions, and in 2020, the Central Bank of Brazil joined the NGFS. In this study, we assess and benchmark the impacts of the Central Bank of Brazil’s Environmental and Social Risk Management policy by conducting interviews with Brazilian large- and medium-sized public, private, and development financial institutions. Central Bank of Brazil staff were also interviewed to gain clearer understanding that what kind of methodologies, tools, and practices would be better to assess financial institutions based on Brazilian Monetary Council (CMN) Resolutions 4327 and 4557.

Based upon our findings, we developed a self-assessment tool that will provide a checklist to help banks grasp the concepts behind the principles-based approach of the national E&S regulatory framework. We found Tropicalisation of international benchmarking from oversight bodies and market players (mainly those related to Taskforce on Climate-Related Financial Disclosures recommendations) is a way to improve E&S risk management process in Brazil (and potentially in other Latin American countries). Similarly, since 2020, high-level management engagement has enabled the Central Bank of Brazil to begin a better integration of E&S and climate issues into its regulation and supervision.

Politica Regulatoria Financiera Verde para America Latina en el Post-Corona

Por más de un año, la pandemia del COVID-19 ha presionado a gobiernos, economías y la salud publica a un punto de quiebre.  Solamente en Sudamérica, ha habido más de 25 millones de casos registrados y 679,376 muertes asociadas al COVID-19, siendo el brote epidemiológico en Brasil el tercero mas intenso en el mundo. En medio de este gran sufrimiento humano y económico, la Latinoamérica también enfrenta un riesgo económico substancial, a lo cual se les suma una alta exposición a conflictos socioambientales, emergencias climáticas y al cambio climático a largo plazo.

¿Cómo América Latina puede recuperarse de la pandemia del COVID-19 y, a la vez, enfrentar de la mejor manera las debilidades sistémicas en el sector regulatorio financiero? ¿Qué herramientas de política están disponible para los reguladores financieros? ¿Cómo pueden incorporarse en el futuro los riesgos climáticos en la política de regulación financiera?

Durante el otoño boreal del 2020, el Global Development Policy Center de Boston University (GDP Center) convocó un Grupo de Trabajo compuesto por reguladores bancarios, banqueros de desarrollo y otros expertos afines de América Latina para revisar las herramientas de regulación financiera disponibles y definir una hoja de ruta a seguir. El nuevo reporte elaborado por Daniel Schydlowsky, Investigador Distinguido del GDP Center, resume las discusiones y recomendaciones del Grupo de Trabajo hacia una política financiera y regulatoria “verde” en América Latina post COVID-19.

Dentro de las recomendaciones del Grupo de Trabajo resalta la necesidad que los agentes financieros no solo tomen en consideración los efectos directos de sus acciones, sino también los efectos indirectos de estas. Asimismo, que el sector financiero, en su conjunto, adopte políticas que ayuden la internalización de los riesgos externos. En ese sentido, el Grupo de Trabajo recomendó que se adopte y centralice un sistema de Manejo de Riesgos Ambientales y Sociales (ESRM, por sus siglas en ingles) en todo el diseño de la política regulatoria financiera en América Latina. Originalmente desarrollado para la aplicación en la industria de financiamiento de proyectos y plasmado en los Principios del Ecuador, la aplicación de un sistema de ESRM de manera obligatoria en todo el sistema financiero aseguraría que cualquier entidad financiera incluya en la evaluación proyectos no solo el efecto de las actividades circunscritas al negocio a financiar, sino también aquellas en vinculadas a un contexto económico más amplio. Esto incluye consideraciones acerca del impacto del proyecto en trabajadores, sus familias y comunidades, proveedores y clientes; así como requisitos para manejar quejas por parte de trabajadores, vecinos y otros, y compromisos de acciones correctivas donde se pueden anticipar daños socioambientales.

De igual manera, el sistema de ESRM debería estar apoyado por otros instrumentos de política regulatoria específicos para afrontar riesgos climáticos particulares. Esto es importante para las política medioambientales y climáticas de corto, mediano y largo plazo, así como para las políticas relaciones con la respuesta ante desastres naturales. La recuperación de la pandemia del COVID-19 requerirá, de igual manera, del diseño de políticas especificas que tomen en cuenta las circunstancias económicas particulares creadas a raíz de esta pandemia.

En resumen, la adopción de un sistema de ESRM y de instrumentos de política específicos conllevaría a políticas de regulación financiera que puedan asegurar la solidez del sistema financiero a largo plazo y también contribuir a la evolución sostenida de la economía por una senda mas consistente con los requerimientos medioambientales y del cambio climático.

Miembros del Grupo de Trabajo:

  • Evasio Asencio, Commissioner Owner, Comisión Nacional de Banca y Seguros, Honduras
  • Carolina Benavides-Piaggio, Senior Capacity Development Officer, FMO, The Netherlands
  • Keron Burrell, Head Methods, Analysis and Quality Review Department Bank of Jamaica
  • Ethel Deras, President Comisión Nacional de Banca y Seguros, Honduras
  • Rafael Del Villar, Advisor to the Governor Banco de México, Mexico
  • Alan Elizondo, Director General FIRA Mexico
  • Mariana Escobar, Head Sustainable Finance Group Superfinanciera Colombia
  • Daniel Gomez Santeli, Risk Manager Comisión Nacional de Banca y Seguros, Honduras
  • Kemar Hall, Assistant Director (Acting) Policy, Research, Methodology, and Development Department Bank of Jamaica
  • Patricia Moles, Advisor Banco de México, Mexico
  • Sheriffa Monroe, Director Policy, Research, Methodology, and Development Department Bank of Jamaica
  • Carlos Alberto Moya, Consultant
  • Carmen Navarro, Senior Social and Environmental Officer, FMO, The Netherlands
  • Angel O’Dogherty, Co-General Director Sector Intelligence, FIRA, Mexico
  • Pascual O’Dogherty, Secretary General, Association of Banking Supervisors of the Americas, Mexico
  • Daniel Schydlowsky, Boston University Global Development Policy Center, USA
  • Guilherme Teixeira, Manager Sustainable Finance, Sitawi, Brazil