The risks arising from climate change, biodiversity loss, deteriorating social and working conditions, and inadequate corporate governance mechanisms - the so-called environmental, social and governance (ESG) risks - affect the actual and potential growth of the economy. The primary role in combating climate change and ESG risks belongs to governments. However, these risks are also important for central banks and supervisory authorities, as they can affect their ability to pursue institutional objectives relating to monetary and financial stability, as well as the soundness of individual intermediaries (E. Bernardini, I. Faiella, L. Lavecchia, A. Mistretta and F. Natoli, Central banks, climate risks and sustainable finance, Banca d'Italia, Questioni di Economia e Finanza (Occasional Papers), 608, 2021).
For central banks, such risks also matter in their activity as institutional investors. Since 2019, the Bank of Italy has begun to use ESG criteria in the management of its non-monetary policy portfolios. In its Sustainable Investment Charter, published in 2021, the Bank has defined three strategic lines of action: (a) promoting ESG sustainability through disclosure by issuers and financial system operators; (b) integrating ESG principles into portfolio management, thus helping to expand the use of sustainability best practices; and (c) publishing data and research on sustainable finance, reporting regularly on the targets reached, and fostering the ESG culture in the financial system and among citizens.
The Bank of Italy's Annual Report on Sustainable Investments and Climate Risks describes how the Institute manages the investment activity of its non-monetary policy portfolios, and in particular how it takes into account sustainability and climate risks. The report draws on recommendations developed by the Task Force on Climate-related Financial Disclosures (TCFD) and the Network for Greening the Financial System (NGFS), of which the Bank has been a member since 2019. The report devotes a chapter to each of the four profiles indicated by the TCFD: (a) governance; (b) strategy; (c) risk management; (d) metrics and targets.