As climate-related risks are becoming more pressing, central bank reserve managers are taking notice. OMFIF’s Global Public Investor 2023 report, based on a survey of 75 reserve managers with close to $5tn in assets, finds that climate change is becoming a key investment risk and sustainable assets are gaining tractions among central banks.
For this group of public investors, geopolitical tensions and inflation are the primary long-term concerns. They are noted as a top-three worry for over 70% of survey respondent over the next five to 10 years. But climate change is also a key factor with 52% including it in their top three (Figure 1) – albeit mainly as a tertiary concern (30%).
Figure 1. Geopolitics, inflation and climate change are key long-term concerns
What are the most important economic factors affecting your investment approach over the five to 10 years? Share of respondents, %
Source: OMFIF Global Public Investor 2023
An encouraging finding is that reserve managers are also starting to do something about this. The GPI 2023 report finds that 65% of central banks implement some form of ESG criteria such as investing in sustainable financial assets, negative screening and impact or thematic investing. This increase from 58% in 2022 is a promising indication that ESG is becoming more of a mainstream factor in central banks’ reserve management strategies.
However, this trend is not homogenous across economies. Advanced economies are more proactive in integrating ESG criteria, with a considerable 87% of respondents indicating ESG implementation, compared to only 35% in emerging market economies. The gap is particularly evident when analysing investments in sustainable financial assets.
Figure 2. Green bonds are the sustainable asset class of choice
Which sustainable assets do you invest in? Share of respondents, %
Source: OMFIF Global Public Investor 2023
Central banks across all regions are diversifying their portfolios to include sustainable financial assets, such as sustainable bonds, equities and exchange-traded funds. The survey responses highlight a shift in investment preferences within these categories. Green bonds, although experiencing a slight decrease compared to 2022 (due to a change in the sample of survey respondents), remain the most favoured choice for central banks, with 63% investing in them. Social bonds rank second, with 42% of central banks allocating funds to them. Panellists at the launch event for the GPI also underscored the importance of investing in ESG products – especially green bonds – in order to achieve the energy transition in the coming decade.
The gradual increase in allocations to sustainable financial assets by central bank reserve managers signifies a recognition of the importance of addressing environmental and social challenges, as well as the energy transition in the coming years. There are regional differences among institutions. Reserve managers in European central banks are more proactively investing in sustainable assets, with 81% investing in green bonds, followed by 53% that invest in social bonds, 23% that invest in other ESG bonds and sustainable ETFs and 15% who invest in green/sustainable equities.
Banks in Asia Pacific and Latin America and the Caribbean are catching up with European counterparts and have increased investments in sustainable asset classes compared to previous years. None of the countries in the sample in the Middle East and North Africa invest in green bonds, but encouragingly, survey responses indicate that they do intend to increase allocations to green bonds and social bonds in the next 12-24 months. The overall global trend of increasing investments in sustainable assets indicates a stronger commitment to ESG principles among central banks.
Central banks are not the only financial institutions that demonstrate slow progress on the ESG front. A report by FinanceMap found that asset managers invest more in polluting companies than those actively working to lower carbon emissions. They found that the 45 asset managers in their report had 2.8 times more investment in companies that are involved in fossil fuel production, compared to those working to meet the goals of the Paris agreement. Similar to the case of central banks, European asset managers perform better than those in other regions, in terms of investing more in companies that are transitioning.
Global pension funds are also increasingly looking at climate change when making investment decisions. OMFIF’s Global Public Pensions report 2022 found that more than half the GPFs rank climate change as one of their top two long-term concerns. In terms of investing in sustainable assets, 76% of GPFs invest in sustainable assets, with 59% investing in green bonds. This trend is expected to continue. At the end of 2022, over 80% of respondents plan to invest more in renewable industries and almost 60% said they will allocate more to transitioning fossil fuel and emissions-intensive industries. The Global transition finance summit, hosted by OMFIF and SGX Group in November will bring together prominent figures from both the public and private sectors to facilitating a forward-looking discussion about these themes.
Despite disparities between advanced and emerging economies and a slow pace of action, the increasing focus on sustainable financial assets underscores the complexity of this transformation. Financial institutions’ commitment to addressing these challenges, fostering collaboration and urging awareness will determine the pace and extent of ESG integration, thereby shaping the future of global finance.
Arunima Sharan is Senior Research Analyst at OMFIF.
These findings could be explored in OMFIF’s 2023 Global Public Investor report. Read here.