The sustainable investor for a changing world

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Here is the second in a series of regular articles on current academic research into a range of responsible investment topics. The papers discussed were presented at the annual GRASFI [1] conference.

Compelling academic papers

Jane Ambachtsheer, global head of sustainability at BNP Paribas Asset Management, on this series:

In 2017, the Global Research Alliance for Sustainable Finance and Investment (GRASFI) was formed as a collaboration of universities committed to producing high-quality interdisciplinary research and curricula on sustainable finance and investment. This series highlights 10 of the most compelling academic papers presented following their third academic conference, virtually hosted by Columbia University, with some ‘practitioner takeaways’ provided by BNP Paribas Asset Management investment professionals. We sponsor GRASFI to bring academic rigour to the pressing challenges of sustainable finance and investment. Our goal is to share these reflections with clients and the industry. We invite you to visit the GRASFI Conference website.

Assessing central banks’ role in tackling climate risk and promoting green finance [2]

Maintaining low and stable inflation to keep their economies in balance is a mainstay of central banks’ mandates. However, with the inevitable knock-on effects of climate change on inflation, economic output and social and financial stability, can one argue that central banks’ analyses and actions should also address such risks?

Using the IMF’s Central Bank Legislation Database, a recent paper from researchers at the SOAS University of London, ‘Central Bank Mandates, Sustainability Objectives and the Promotion of Green Finance’, presents a detailed analysis of central bank mandates and objectives. [3]

It then compares these to current arrangements and sustainability-related policies central banks have adopted. It also explores how central banks can contribute to the ‘greening’ of the global financial system. This would require an explicit environmental mandate, which few central banks have.

Increasingly frequent extreme weather events can hit agricultural output, increase food prices and affect inflation, employment and income. As the risks associated with a changing climate are not linear, major shocks to the global financial system cannot be ruled out. However, so far, few central banks and supervisory authorities have embedded this within their systemic risk frameworks.

Taking action on climate change is more vital than ever, and central banks can and will play a crucial role in the years ahead, through the provision of information, analysis and affirmative action and policy decisions.

The paper is clear, however, that national governments and policymakers must be willing to grant central banks the new powers they need to lead the fight against rising global temperatures. As the research concludes: “A central bank that does not address climate risk is failing to do its job.”

Commenting on the paper, Johanna Lasker, head of the Official Institutions Group at BNP Paribas Asset Management, said:

“The authors of this paper offer a comprehensive assessment of the complex challenges and opportunities faced by central banks in determining how to incorporate climate risk into their mandates, concluding that they have a critical role to play in the development of green finance.”

[1] The Global Research Alliance for Sustainable Finance and Investment is a worldwide network of 19 leading universities that was established in 2017 to promote rigorous academic research into finance and responsible investment. BNP Paribas Asset Management has been the asset management sponsor of GRASFI since 2018. Through its sponsorship, BNPP AM is able to access leading academic research into sustainable finance and investment, helping to inform the broader debate.

[2] This is an extract of a longer article on this topic on our Investors’ Corner blog

[3] The paper by Simon Dikau and Ulrich Volz at SOAS Department of Economics is available here:

Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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