Annual report on sustainable investments and climate-related risks for 2024

In continuity with the previous issues, this Report fulfils two of the commitments made by Banca d'Italia in 2021 with the publication of the 'Responsible Investment Charter': to regularly report on the results achieved and on the methodologies used to incorporate environmental, social and governance (ESG) criteria into the management of its investments, and to help spread a sustainable finance culture in the financial system and among the general public.

With this Report, the Bank also fulfils the commitment made together with the Eurosystem central banks to apply sustainable and responsible investment principles to non-monetary policy portfolios and to regularly publish information on the climate-related risks of these investments.

The metrics and methodologies described in this Report are based on the current state of play of the debate, the available data and the relevant legislation. They are therefore subject to ongoing scrutiny and may be amended to reflect new developments.

The investments covered by this Report include the financial portfolio, the foreign currency reserves, and the Supplementary Pension Fund for Banca d'Italia staff.

The governance of investments

The Governing Board, assisted by the Strategies and Financial Risks Committee, oversees investments and approves the strategic portfolio allocation proposals. The Climate Change and Sustainability Committee provides strategic guidance and coordination and promotes analyses that help to fine-tune Banca d'Italia's sustainable investment methodologies.

Strategy

Over the course of 2024, the Bank continued its efforts to integrate sustainability objectives into strategic asset allocation and securities selection. These objectives focus on protecting the environment in line with national and European legislation, and on taking into consideration corporate social responsibility and the adoption of the best corporate governance standards.

The management of the financial portfolio and foreign currency reserve investments involves an initial stage of strategic allocation to determine the shares for the individual financial asset classes, and a second phase to select the issuers and the securities. In the strategic allocation phase, the sustainability objectives focus on the ESG score and the weighted average carbon intensity (WACI) of investments in the securities of private-sector issuers. The adoption of sustainability criteria for the Supplementary Pension Fund's investment activity has been implemented gradually since 2020, mainly by selecting market indices that are representative of the different asset classes and that take ESG factors into account.

Risk management

The Bank considers both financial risks and the risks that could arise from climate change or from other ESG issues. Sustainability risk management in the allocation phase for equity and corporate bond portfolios is conducted by favouring the firms with the best ESG practices in each sector and those most committed to the climate transition (best-in-class strategy). To mitigate climate transition risk, the portfolios are constructed by considering both the emissions recorded in previous years and the decarbonization targets of each firm, with a view to supporting reconversion by those in high-emission sectors. As regards sovereign bonds, the sustainability objectives are pursued through the gradual expansion of green bond portfolios. Sustainability metrics are included in the Bank's periodic investment reports, which are intended for the heads of the units dealing with investments, the relevant committees, the Governing Board and, as regards the Supplementary Pension Fund, its members.

Metrics and targets

The weighted average carbon intensity of the portfolios has fallen significantly over the last five years. The largest changes were recorded for equities and corporate bonds in the financial portfolio (down by 59 and 58 per cent respectively), as a result of the investment strategies adopted, the progress made by firms in their sustainability policies, especially in decarbonization, and inflation. The share of green government bonds in the financial portfolio has reached 5.4 per cent over the last five years; furthermore, the share of sustainable bonds issued by international organizations and agencies amounts to 14.6 per cent.

Banca d'Italia is committed to reviewing its investment strategy regularly to help pursue, in accordance with its mandate, both the Paris Agreement goals and the European Union's target of carbon neutrality by 2050. However, the actual achievement of these goals is influenced by several factors: compliance with the commitment to climate neutrality declared by the firms and countries in whose securities the Bank invests; financial market participants' support of the climate transition; the fine-tuning of the methodologies used for estimating climate-related risks; and the impact that investment choices can have on firms' climate strategies. These factors make it difficult to set targets for reducing the carbon footprint of investments. Moreover, the Bank also considers that achieving a reduction in the carbon footprint of portfolios in the short term, based on the current state of the art, is not necessarily the best way to pursue long-term climate objectives. Banca d'Italia has therefore chosen, for the time being, not to set short- and medium-term carbon reduction targets and to continue to study the effects of investment choices on the conduct of the issuing firms, to promote the disclosure of the information needed to tackle climate change, and to make sustainable investment choices.