The financial portfolio of Bank of Italy becomes from year to year more sustainable. This is what emerges from the second edition of the "Annual report on sustainable investments and climate risks" published today by Via Nazionale, according to which "the evolution of the indicators confirms the positive results of recent years". The report describes the governance structure, strategy and process by which the Bank of Italy manages its investments, and in particular how it takes into account sustainability and climate risks.
The 3 portfolios of the Bank of Italy
The paper analyzes three different types of wallets. The first is the financial portfolio, the largest one, whose value at the end of 2022 amounted to 133,7 billion euros and whose composition is mainly characterized (86%) by government bonds, most of which are Italian. The second is the foreign exchange reserve portfolio which at the end of last year were worth €44,2 billion (excluding net claims on the IMF) and comprised US dollars (74%), yen, sterling, Canadian and Australian dollars, renminbi and South Korean won. Finally there is Supplementary pension fund of Bank of Italy employees hired since 28 April 1993, which manages pension funds for a total value of 700 million euros invested in various activities.
In total, at the end of 2022 these portfolios had a combined value of 169 billion euros.
Sustainability: how does the Bank of Italy invest?
The investment strategy of the Bank of Italy pursues 2 objectives: “improve the risk and return profile of wallets and contribute to environmental protection, with particular attention to the fight against climate change". To achieve them, three different lines of action are put in place: the integration of climate neutrality and ESG criteria in investment and risk management; the promotion of transparency on sustainability profiles; and publication of results, guides and research.
“For internally managed portfolios of shares and corporate bonds, the investment strategy adopted by the Bank of Italy provides for the exclusion of issuers in the presence of violations of international rules and conventions on labour, weapons and tobacco”, explains the report, underlining that the strategy of via Nazionale aims to favor, within each sector, companies with the ESG best practices and those most engaged in the climate transition. Particular attention is then paid to forward-looking indicators, in particular to the ambition and credibility of the decarbonization commitmentsrather than the level of emissions. “This strategy tends to produce slower improvements in portfolio climate indicators than could be achieved by divesting from high-carbon firms,” but has “two advantages: avoids penalizing companies in the sectors responsible for significant greenhouse gas emissions that are more committed to the decarbonisation of their activities; represents the correct way to mitigate portfolio transition risk”, underlines the Bank of Italy.
Bank of Italy: "The climate indicators of investments are improving"
At the end of 2022, the climate indicators of investments in shares and corporate bonds of the Bank of Italy, relating to both climate risks and other sustainability risks, "are improving", underlines the Bank of Italy.
As regards the financial portfolio, the largest in terms of size, “the evolution of the indicators confirms i positive results in recent years”, continues via Nazionale. In percentage terms, the indicator ofweighted average carbon intensity (Waci) del direct equity portfolio it is 32% lower than the benchmark market index and is down 36% compared to the end of 2020, against a 16% reduction recorded by the benchmark index. Speaking instead of corporate bonds, the reduction in the two-year period was -16%, while the figure for 2022 is 18% lower than the reference index. The third front is that of the government bonds, with the share of green bonds in the financial portfolio growing in one year from 0,7 to 2,8%. “Even the portfolio indicators of the Supplementary pension fund show improved climate indicators for equities and corporate bonds,” confirms the report.
Another aspect to take into consideration concerns the fact that the improvements reported above "reflect in part similar trends in the reference index" and "are linked, among other things, to business progress in decarbonisation paths, witnessed by the growth of companies with validated climate commitments and objectives, which have risen in terms of weight from 43 percent of the index in 2020 to 70 in 2022".
Green bonds in portfolio are increasing
The report highlights that in 2022 the weight of green bonds between investments in government bonds and supranational bodies grew. In particular, in the financial portfolio, green bonds constitute 2,8% of investments in government bonds compared to 0,03% in 2020, 20,5 percent of investments in securities of international organizations and agencies (5,3 percent in 2020) and 6,9% of investments in corporate bonds.
