Published: 08.12.2021

Why is Latvijas Banka concerned about sustainability?

The economic development of the mankind has reached unprecedented heights, but adverse side effects are becoming increasingly apparent, taking the form of unacceptably profound inequalities, depletion of natural resources and intensifying climate change. These changes explicitly demonstrate that the drive for short-lived gains rather than the pursuit of smart development and value is not sustainable in the long run. It is obvious that the idea of responsibility towards future generations has not materialised. This problem has grown to such an extent that we must both mitigate climate change and adapt to the ongoing changes simultaneously. This, in turn, involves a wide range of macroeconomic risks, the identification and management of which are crucial both with regard to macroeconomic and financial stability, thus having a direct effect on the attainment of the objectives of each central bank. It has a direct and substantial impact on successful performance of Latvijas Banka's tasks, such as the implementation of monetary policy, promotion of financial stability, management of foreign reserves and other financial investments, as well as other functions of Latvijas Banka.

The identification and governance around current and future risks are instrumental for successful conduct of a central bank's tasks. Economic and policy analysis requires additional effort, where data availability is one of the challenges.

The financial system must be able to adapt to the changing environment, increase its resilience and provide support to achieving sustainability. Latvijas Banka pursues long-term public good in its activities and is willing to maximise its contribution to achieving sustainability.

Central banks play a special role, i.e. using their independence and competence, they shape a long-term decision-making culture both in the public sector and in society as a whole regardless of economic and political cycles.

What is Latvijas Banka's understanding of sustainability?

Sustainability is a paradigm in which environmental, social and economic considerations are balanced in the pursuit of an improved quality of life throughout time. In a sustainable approach the planetary boundaries are respected, and economic development is directed towards equal opportunities and quality of life for everyone in society.

The progress made in international cooperation and the growing interest of private economic structures demonstrate the inevitability of further changes.

The expected changes will not be fast and easy to implement, and this also applies to Latvia. The achievement of the climate neutrality objectives, adaptation to the climate change, reduction of inequalities, prevention of environmental pollution and conservation of biodiversity represent only the most prominent challenges to Latvia's long-term development. A socially and ecologically sustainable society is also a prerequisite for further economic development of future generations. The scale of changes, political decisions required for solutions and the speed at which decisions are implemented will affect Latvia's financial and economic system in the most direct manner.

A forward-looking approach to the choice and timely implementation of national priorities defined to achieve sustainability objectives as well as joint fulfilment of international commitments undertaken by countries ensures a stable and predictable environment for functioning and development of the financial and economic system.

What is the international framework we operate within?

The achievement of sustainability objectives is a global challenge and one of the European Union's policy priorities. Given that a number of risks are beyond the sphere of a central bank's direct influence, it is vital to establish cooperation not only at national but also at international level. In its activities and analysis, Latvijas Banka complies with the dynamically evolving international framework, including the Eurosystem's policy and the European Union's Green Deal objectives, climate change objectives (currently – the Paris Agreement) and the 17 Sustainable Development Goals defined by the UN. Latvijas Banka takes part in the work of the Network for Greening the Financial System, which is the most significant international platform focusing on cooperation between central banks and supervisors of financial markets to ensure sustainable transformation of financial systems.

The key areas of action

  • Sustainable monetary policy

We support incorporation of climate goals into the European Central Bank's monetary policy strategy and play an active role in its implementation. Latvijas Banka, within its remit, actively contributes to the implementation of the Climate Action Plan both by expanding its analytical capacity and by incorporating climate change-related considerations into monetary policy operations. We advocate a more comprehensive integration of sustainability objectives in monetary policy.

  • Sound and sustainable financial system

We incorporate both the physical and transition risks into the analysis of risks to sustainability within the monitoring and assessment framework. This also involves development of the financial sector stress test methodology by integrating climate change scenarios into the stress tests.

We actively promote mitigation of risks to sustainability by contributing to improvements to legal acts and availability of information.

We include considerations related to the reduction of sustainability risks in the implementation of the macroprudential policy.

We cooperate with the financial sector and the competent authorities to facilitate a sustainable investment environment, inter alia, by enhancing recognisability of sustainable investments and distinguishability from green and greenwashed investments.

  • Data collection and processing

We identify the economic and financial data needed for the analysis of sustainability aspects and decision making to facilitate their availability and consistency in Latvia and in the international arena, particularly regarding the missing data.

We improve statistics provided by Latvijas Banka to ensure high-quality financial statistics also concerning sustainability, inter alia, by adding new information to the Credit Register detailed data on the loans granted. We support the path opened up by the European System of Central Banks and the European Statistical System towards the development of the methodology for the provision and acquisition of statistical data necessary for sustainability analysis, and we cooperate in this field.

  • Sustainable cash circulation

Our work fosters convenient use and accessibility of cash when making day-to-day payments, thus ensuring involvement of all members of the public in the economy, while at the same time reducing security risks in Latvia.

We take measures to reduce the ecological footprint of cash production, processing and circulation by recycling coin metal, limiting the volume of circulation coin production, exchanging circulation coins with other euro area countries as well as burning the waste arising from cash processing in high efficiency cogeneration units. At the same time, we analyse the possibilities allowing to utilise waste resulting from cash processing in a more efficient and climate neutral manner.

We set up and maintain inclusive and energy-efficient payment systems.

  • Management of foreign reserves and other financial investments

We analyse incorporation of sustainability objectives into Latvijas Banka's policy for management of foreign reserves and other financial investments.

Within the Eurosystem's framework, we procure climate data and rating systems to integrate the selected systems into the investment management process and will prepare the Eurosystem's first report on disclosure of information on investments. It is expected to make the report public in the first quarter of 2023.

We work on changes to the equity portfolio managed by Latvijas Banka to enhance carbon neutrality by 2050 at the latest and ensure compliance with the provisions set out in the Paris Agreement. The relevant changes will be implemented in 2022.

  • Social responsibility policy and analytical work

We enhance informed decision making in Latvia by offering our expertise and by counselling all national constitutional bodies.

We engage in an active dialogue with the financial sector to forge a common understanding and facilitate sustainable transformation of the sector.

Latvijas Banka, fostering financial literacy of the general public through public initiatives (lectures, seminars, discussions, etc.) and educational materials, enhances skills and knowledge of teachers, schoolchildren, students and all interested parties concerning the meaning of sustainability. Thus, enhancement of the target audience's professional competence concerning sustainability and its willingness to exploit the knowledge acquired to achieve sustainability objectives in practice are promoted.

  • Sustainable institution

We integrate sustainability objectives into various areas of the bank's operational activities.

Our employees improve their knowledge of sustainable development, we encourage their "green" habits.

In its activities, Latvijas Banka complies with environmental protection standards and facilitates, to the extent possible, circular economy practices. Complete digitalisation of document circulation, waste sorting, solar panels and automated management of electrical equipment have reduced the ecological footprint of Latvijas Banka.

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