In continuity with the previous Report, this document fulfils two of the commitments taken on by the Bank in 2021, with the publication of the Responsible Investment Charter: to regularly publish information on the results achieved and on the methodologies applied to integrate environmental, social and governance (ESG) criteria into the allocation of its investments and into risk management and to contribute to the dissemination of the culture of sustainable finance in the financial system and among citizens.
With this Report, the Bank also puts into practice the commitment it has taken on, together with the Eurosystem central banks regarding the regular dissemination of information on the climate-related risks for non-monetary policy portfolios.
The approaches and methodologies described in this Report are based on the current state of the debate, the available data and the relevant legislation; they are therefore subject to continuous scrutiny and may evolve in line with any new developments.
The governance arrangements adopted by the Bank for its investment choices remained unchanged in 2022. The following are described: the phases in the investment process into which sustainability profiles and climate‑related risks are integrated; the functions tasked with the proposals and the bodies that oversee their approval; how the information on sustainability profiles and climate-related risks is communicated to the Bank's senior management; and the role played by the Climate Change and Sustainability Committee, which coordinates and steers the Bank's work on all ESG issues.
The Bank's investment strategy has combined financial and sustainability criteria since 2019. With its 2023-2025 Strategic Plan, the Bank will further strengthen its commitment to integrating the two aspects, thereby contributing to improving the management of sustainability risks and to combating climate change.
The Bank has decided not to adopt investment strategies based simply on excluding issuers from economic sectors with the biggest carbon footprints, and instead gives priority to the firms in each sector that are most committed to the climate transition. To this end, the models for selecting corporate equity and bonds have been revised in order to take account of firms' decarbonization commitments.
Two new activities were undertaken last year. Firstly, a thematic portfolio was set up, focusing on euro-area firms whose production allows them to contribute more to the transition towards a low-carbon economy. A constructive dialogue was also begun with the firms responsible for most of the greenhouse gas emissions associated with the Bank's equity portfolio, in order to look into their transition plans and to illustrate the Bank's sustainable investment strategy.
With reference to bonds issued by supranationals, sub-nationals and agencies, the sustainability strategy deemed most suitable is that of thematic investment, by means of the gradual expansion, within the financial portfolio and the foreign currency reserves, of portfolios of green bonds.
The strategies presented make use of both the Bank's research and its participation in the national and international debate, particularly within the Eurosystem and the NGFS.
The risks linked to the sustainability can affect the financial risk and portfolio yield profiles;2 they also impact people's well-being, financial and price stability, the actual and potential growth rate of the economy, and therefore the institutional objectives of central banks. This is why the Bank is integrating climate‑related and sustainability factors into its models for managing portfolio risks, starting with the strategic allocation phase. The selection of investments takes its cue from the results of a model that minimizes any capital losses that might occur, over a ten-year horizon, in the most adverse economic and financial scenarios, while, through specific constraints, improving (or at least maintaining) the ESG score of the portfolios year by year and gradually reducing the weighted average carbon intensity of investments in private issuers.
In the subsequent investment selection phase, the integration of sustainability criteria takes place in different ways for each financial asset class. Specifically, for direct investment in corporate equity and bonds, the goal is to improve the ESG score and the climate metrics, compared with both the past and with the benchmark. The control of climate risk takes place bearing in mind not so much the level of historical emissions, but rather how it has changed and what firms' transition plans are. This is in the belief that this is the most appropriate way to monitor transition risk and that limiting the focus on the level of past emissions would run the risk of penalizing companies in carbon-intensive sectors when they try to raise the necessary capital to support these plans.
Metrics and targets
The metrics analysed are for both climate risks and other sustainability risks. As far as the financial portfolio is concerned, which is the biggest in terms of size (€134 billion at end 2022), the evolution in the metrics confirms the positive results of the last few years. The metric for the weighted average carbon intensity of the direct equity
portfolio is 32 per cent lower than the market benchmark and is down by 36 per cent against the figure for end-2020, compared with a decrease of 16 per cent in the benchmark. Corporate bonds have declined by 16 per cent over the two-year period; the final figure is 18 per cent lower than the benchmark. As regards government bonds, the share of green bonds in the financial portfolio has grown in one year from 0.7 to 2.8 per cent. The metrics for the Supplementary Pension Fund also show an improvement for corporate shares and bonds.
With reference to the other aspects of sustainability, the equity and corporate bond portfolios have aggregate ESG scores above the benchmark. Some data, such as those on gender diversity in management bodies, are better than the benchmark for all the portfolios analysed. An examination of the other ESG data, such as those on consumption of resources and on well-being at work, highlights how the efforts to make direct equity portfolios more sustainable have borne fruit over time.
As regards targets, the Bank of Italy intends to manage its investments in line with the Paris Agreement and the European Union's target of carbon neutrality by 2050. To this end, the Bank is committed to regular reviews of its investment strategies in order to ensure, according to its mandate, that the path to decarbonization supports the fulfilment of these targets. However, effectively achieving them is dependent on compliance with the commitment to climate neutrality declared by the firms and by the governments in countries in which the Bank invests.