Published: 27.03.2023

Climate change and the transition towards a sustainable economy affect the valuation of financial asset through their impact not only on macroeconomic indicators, such as inflation, output, employment, interest rates, investment, and productivity, but also on financial stability and the transmission of monetary policy. Consequently, climate change and the low-carbon transition also influence the risk profile of the assets held in Latvijas Banka’s investment portfolios, potentially leading to an undesirable accumulation of climate-related financial risks.

The identification and management of climate change and transition risks are especially important with regard to both macroeconomic and financial stability, having a direct effect on the attainment of the Eurosystem’s objectives and also on the successful performance of Latvijas Banka's tasks, including the implementation of monetary policy, promotion of financial stability, management of foreign reserves and other financial investments, and other functions of the Bank.

Latvijas Banka takes part in the work of the Network of Central Banks and Supervisors for Greening the Financial System, as well as supports and actively participates in the implementation of the Eurosystem’s climate policy. A part of Latvijas Banka’s reserves is managed by external asset managers, all eight of whom are signatories of the United Nations’ Principles for Responsible Investment (UN PRI). The external manager of the developed markets equity portfolio also endorses the ISG US Stewardship Principles and ICGN Global Stewardship Principles.

In February 2021, the Eurosystem announced that it will start making annual climate‑related financial disclosures for its euro-denominated non-monetary policy portfolios (NMPPs) within the following two years. The disclosures will follow the recommendations and terminology of the Task Force on Climate-related Financial Disclosures (TCFD) of the Financial Stability Board.

This report presents Latvijas Banka’s first climate-related financial disclosures on its NMPPs (foreign reserves and other non-monetary policy investment portfolios) within the Eurosystem’s framework, structuring the information according to the four TCFD’s categories: “Governance”, “Strategy”, “Risk management”, and “Metrics and targets”. Through improving the transparency of its activities, the Bank aims to contribute to the availability of climate‑related data and a better overall understanding of climate-related risks. In doing so, Latvijas Banka strives to reduce its own environmental impact and to foster action beyond the institution.

Latvijas Banka announced the ambition to incorporate sustainability objectives in the management of NMPPs in its Sustainability Strategy published in 2021. By implementing sustainable investment guidelines for the equity portfolio[1], the Bank seeks to mitigate climate-related financial risks. In 2022, the scope of the portfolio objectives was broadened by integrating climate-related aspects: to enhance carbon neutrality by 2050 at the latest, to ensure the compliance with the provisions set out in the Paris Agreement and to act towards the preservation of biodiversity and enhancement of pollution mitigation strategies. The disclosures will be improved and updated over time in line with the advancements in climate data availability and quality as well as the developments in sustainable investment strategies and joint international commitments.


[1] The developed markets equity portfolio accounted for 9% of NMPPs as at 31 December 2022.

While the Eurosystem has a common stance on sustainable investment principles related to climate change, the management of NMPPs is at the discretion of each central bank. Following the adoption of its Sustainability Strategy in 2021, Latvijas Banka considers sustainability in the management of NMPPs along the traditional objectives: safety, liquidity, and return.

Latvijas Banka has adopted an integrated approach to the governance of climate-related issues; therefore, climate-related considerations are addressed within its existing governance and investment management structures.

The Council of Latvijas Banka is responsible for approving the principles and targets related to investment activities, including climate-related investment targets. Latvijas Banka’s Investment Committee and the Market Operations Department implement these principles in practice and report to the Council at least once a year.

To date, Latvijas Banka has applied its Sustainability Strategy principles to its developed markets equity portfolio and is working on incorporating sustainability objectives into its investment policy for other NMPPs. Within the Eurosystem's framework, the Bank procures climate data and climate ratings systems to integrate them into the investment management process and to report on climate-related financial disclosures in line with the Eurosystem’s common stance.

The current climate-related risk management framework is not considered final. It is expected that over time sustainability-related data disclosures will be enhanced and further improvements will be possible, especially in the field of metrics, data standards, and quality.

In November 2021, Latvijas Banka announced the ambition to incorporate sustainability objectives in the management of NMPPs as set out in its Sustainability Strategy. Given the Bank’s conservative and thus limited investment scope, currently the incorporation of sustainability targets in NMPPs is primarily dependent on advancements in data disclosures and metrics.

3.1 Equities

So far, Latvijas Banka has developed and approved dedicated sustainability targets for the developed markets equity portfolio. The implementation of the principles of the Sustainability Strategy in this portfolio was completed in 2022.

For the developed markets equity investments, Latvijas Banka has applied the following sustainability strategy elements: climate-related risk mitigation, thematic investment, engagement, conduct, product, engagement-based and Paris‑Aligned Benchmark (PAB) activity‑based exclusions, biodiversity, and waste reduction, along with environmental, social and governance (ESG)-related tilting.

3.1.1. Climate-related risk mitigation and thematic investment strategies

The results from a potential impact analysis show that climate and sustainability-related strategies applied to equity investments would generate a meaningful impact due to both data availability and possibilities of engagement with issuers. The risk mitigation strategy for the equity portfolio covers transition risks and physical risks.

Climate-related risk mitigation is achieved by optimizing the equity portfolio in a way that enhances carbon neutrality by 2050 at the latest and ensures compliance with the provisions set out in the Paris Agreement by targeting a reduction in carbon intensity by 50% against the benchmark or self-decarbonisation by 7% per annum (2019 base year), whichever is lower at any given time. Meanwhile, opportunities are captured by applying investment tools provided by the external manager: the green opportunities factor and the glide path transition factor.

3.1.2. Engagement

A sufficient change cannot be achieved by the mere exclusion of issuers that currently do not meet the relevant criteria, instead a more significant impact in the longer term can be achieved via active ownership. The equity portfolio is managed by an external asset manager to whom Latvijas Banka has outsourced the engagement process, evaluating the manager’s capabilities to incorporate climate impact strategies and to ensure active engagement. The external manager has a comprehensive engagement policy and experience in engagement and voting according to the respective guidelines. This engagement policy allows the Bank to leverage its position as a shareholder in public companies to influence corporate decision‑making in relation to climate-related risk and other ESG-related factors. The main objective is to reduce greenhouse gas (GHG) emissions and to ensure that investees’ climate-related risk exposure is reduced, while also contributing to sustainability and evolution of good governance practices. Through engagement, the Bank also advocates the enhancement of quality and availability of data disclosures for investee companies.

Latvijas Banka believes that the broader use of material ESG information in the investment analysis process leads to better-informed investment decisions. The external manager’s stewardship policy is its commitment to act as an active owner of assets managed on behalf of the Bank.

Carrying out its stewardship responsibilities is a core element of the external manager’s fiduciary duty and involves:

  • building relationships with companies through regular and on-going engagement;
  • tracking progress of dialogue with companies;
  • voting on all resolutions globally, where practical, in line with Latvijas Banka’s guidelines;
  • working with other shareholders where appropriate;
  • reporting to the Bank.

3.1.3. Exclusions

There are several types of issuer exclusions applied to Latvijas Banka’s developed markets equity portfolio in order to ensure a wider range of sustainability goals, namely conduct‑based, product-based, engagement‑based and PAB activity-based exclusions. The conduct‑based exclusions are aligned with the UN Global Compact principles, the product‑based exclusions apply to controversial weapons and tobacco producers in accordance with the Global Industry Classification Standard, and the engagement‑based exclusions are identified as laggards within the external manager’s thematic engagement program. The Bank restricts investments in individual companies whose turnover exceeds the thresholds as follows (PAB activity-based exclusions, revenue‑based):

coal mining  maximum 1% 
oil maximum 10%
natural gas  maximum 50%
inefficient electricity production maximum 50%

3.1.4. Biodiversity and pollution

Latvijas Banka applies tilting toward companies with better biodiversity and waste management practices. Tilting is utilized by adding more weight to companies that perform better via two channels: natural capital theme (a score that is a weighted average of water stress, biodiversity and land use, and raw material sourcing scores) (+10% relative to the benchmark) and pollution and waste theme (a score that is a weighted average of toxic emissions and waste, packaging material and waste, and electronic waste) (+10% relative to the benchmark).

3.1.5. ESG

Latvijas Banka favours the engagement rather than the exclusion approach to sustainable investing, and companies are not excluded from the equity portfolio based just on weak ESG scores. However, to emphasize the importance of not only the environmental but also the social and governance factors, the Bank utilizes ESG factor tilting by improving the ESG score of the portfolio by 10% relative to the benchmark.

3.2. Fixed income securities

Further work is being carried out to formulate appropriate sustainability strategies for other NMPPs and the progress reports will be updated annually. Methodological and data issues for other asset classes, most importantly structured instruments (mortgage-backed securities (MBS) and asset-backed securities (ABS)), require further advancements in disclosure and measurement standards before relevant sustainability strategies can be designed and adopted.

A substantial part of Latvijas Banka’s NMPPs are invested in MBS given the asset class’s favourable characteristics as an alternative to the US Treasuries. MBS provide an opportunity to invest through a social lens as the mission of MBS issuers – the government agencies Fannie Mae, Freddie Mac, and especially Ginnie Mae – is inherently driven by social principles, aiming to encourage homeownership and facilitate the flow of government-subsidized residential credit to low- and moderate-income borrowers. Historically, studies have shown a large gap in the US across income levels or ethnic groups.

Currently, the largest challenge in the market is a shortage of consistent, comparable, and widely adopted data points. The evolution of ESG incorporation in the strategies and analysis of the US securitized debt has faced different challenges than that of equities or bonds due to the complexity of the market, a lack of data, and changing classification standards. Government agencies recently have become more transparent by disclosing some income and individual pool data. Despite some of the large advances in initiatives, access to individual loan details remains problematic due to borrower protection laws, prohibiting investors from acquiring complete transparency on social attributes for individual loans within pools.

In line with the integrated approach, climate-related risks are monitored under the overall risk management process, where climate-related risks do not form a new risk category, but rather are an augmenting factor for the existing financial risk categories. Financial risks of NMPPs consist of market, credit, and liquidity risks. Market risks include adverse movements in exchange rates, interest rates, and stock prices. In addition, the Bank’s NMPPs are exposed to climate-related risks.

Latvijas Banka recognizes the importance of developing a thorough understanding of climate-related risks in its NMPPs and has adopted the recommendations and terminology proposed by the TCFD in identifying, assessing, and mitigating climate-related risks.

Latvijas Banka takes a holistic view in managing the potential quantitative effect that climate related risks have on its balance sheet via the NMPPs.
Climate-related risks have been divided according to their nature into “physical” and “transitional”, and their implications are relevant to all assets that are subject to large downside risks. As climate change impacts both macroeconomic and microeconomic factors, financial markets play an important role in translating this impact to market participants through asset prices, which, in the case of corporate bonds and equities, are also exposed to reputational risks and climate-related litigation risks.

Latvijas Banka applies a bottom-up approach and treats climate related risks as reinforcers of financial risks. The sensitivity of financial assets to climate-related risks is calculated based on several metrics and data sources which are jointly identified in the Eurosystem, such as Carbon Footprint and Weighted Average Carbon Intensity (WACI) for assets in traditional asset classes, i.e., government debt, supranational and agency bonds, corporate bonds, covered bonds, and equities. Consequently, the risk management framework includes the management of climate-related risks alongside financial risks as climate-related risks would manifest in financial losses through the realization of credit and market factors.

Latvijas Banka monitors the exposure of its NMPPs to climate-related risks with specific metrics that are integrated into its risk management framework and will be reviewed annually. Further work is underway to explore future developments based on comprehensive climate stress tests.
Latvijas Banka recognizes the importance of developing a thorough understanding of the climate-related risks in its NMPPs relative to other risks. Given the asset allocation of the Bank’s investments, currently these are considered to have a small impact on the existing financial risks in the short and medium term. However, climate-related risks are regarded as more important in the long term.

The section presents Latvijas Banka’s first disclosures of climate-related metrics and targets for its NMPPs within the framework of jointly identified Eurosystem’s climate-related disclosures: data metrics and common data sources that focus on both backward- and forward looking issuers’ disclosures. The calculation of the subsequently presented metrics follows the TCFD’s recommendations and is prepared for holdings as at the end of the corresponding year. Data are made available for the last three calendar years. The main metrics, which together form the basis of the Eurosystem’s common minimum disclosures on NMPPs, are WACI, Total Absolute GHG Emissions and Carbon Footprint.

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