Egil Matsen: US Senate Democrats' Special Committee on the
climate crisis
Opening remarks by Mr Egil Matsen, Deputy Governor of Norges Bank (Central Bank of Norway),
at the meeting, Washington DC, 17 October 2019.
* * *
Chairman Schatz, I thank you for inviting Norges Bank, together with other NGFS-member
central banks, to the U.S. Senate Democrats' Special Committee on the Climate Crisis. I
appreciate the opportunity to discuss climate-related economic and financial risks and relevant
central bank strategies to address those risks.
Norges Bank's mission is to promote economic stability by conducting monetary policy and
monitoring the financial system. Our central bank also has the responsibility for managing
Norway's SWF, the Government Pension Fund Global (GPFG), in accordance with a mandate
issued by the Ministry of Finance. A feature common to both of these mandated responsibilities
is the identification and management of risk. In addressing these risks, we should always work
within our mandates. For central banks that means taking a comprehensive view of factors
impacting the economy and the risks we face, while upholding market neutrality and preserving
our independence.
Climate risk, the economy and financial stability
The scientific basis for climate change is widely accepted. The physical impacts of climate
change and measures to mitigate its impact, will affect all parts of the economy and have
consequences for the financial system. Consequently, climate risk is a relevant consideration for
central banks. There is a large degree of uncertainty among market participants about the
magnitude and the timing of climate change, and about likely policy responses. This type of
uncertainty may be a source of market failure.
Climate risk is a complex topic covering a broad field of issues being to a large degree outside
the remit of central banks. Climate change is a global challenge. The prime responsibility and the
most effective tools to mitigate climate risk lie with governments and with fiscal policy. It is
important to use the market mechanism by pricing emissions to reflect the true costs of
greenhouse gas emissions. However, the financial system must adapt to climate risk. Central
banks and financial supervisory authorities can, within their mandates, promote financial stability
by ensuring that financial institutions appropriately includes climate risk in their risk management.
Climate risk is not fundamentally different from other risks facing the financial sector. Other types
of risks may also be systemic and characterized by historical data having uncertain relevance for
future risks. Both financial institutions and authorities must consider how a changing climate will
affect financial risks. This must be integrated in the risk assessment and hence in the overall
assessment of the capitalization and funding of financial institutions
Uncertainty with respect to the magnitude and impact of climate change can lead to simplified
assessments of its risks. Authorities, including central banks, may contribute to a
knowledgebased debate and reduce uncertainty by strengthening and refining reporting requirements. A
common basis of information and analysis may facilitate assessment and comparison of climate
risk in individual institutions, and lead to a more correct pricing of risk. International cooperation
could be fruitful in this work, including in the NGFS context.
Responsible investment at Norges Bank
In its role as the GPFG's owner, the Norwegian Ministry of Finance specifies the investment
universe, benchmark index, risk limits, and requirements. Norges Bank shall make investment
decisions and exercise ownership rights independently of the Ministry. Within this framework,
Norges Bank works on climate risk across the GPFG's three asset classes - listed equities,
listed bonds, and unlisted real estate - within a general framework of objectives. By end-June
2019, the total market value of the fund was close to USD 1.1 trillion, corresponding to more than
three times mainland GDP of Norway. The United States is by far the greatest receiver of funds,
amounting to 41 percent of the total. To spread risks and capture global growth, the assets were
invested in over 9,000 companies in more than 70 countries. We benefit from free and open
markets that enable an efficient global allocation of resources.
The objective is to achieve the highest possible return with acceptable risk. Responsible
investment supports this in two ways. First, it seeks to improve the long-term economic
performance of the investments. Second, it seeks to reduce the financial risks associated with
Environmental, Social and Governance (ESG) practices of companies in the portfolio. As such,
the focus is on material ESG issues that impact the fund's long-term performance. These issues
are captured in three responsible investment pillars.
First, establishing principles: A set of international principles and standards from the UN and the
OECD provides a framework for the Bank's work with companies and other stakeholders.
Priorities are based on the mandate and are characterised by formulating expectations of
companies, guidelines for voting, and positions on governance issues. Documents communicate
the Bank's priorities and ensure predictability.
Second, active ownership: Voting at annual general meetings is the most important tool for active
ownership. Through its voting, the Bank seeks to strengthen governance, improve financial
performance and promote responsible investment practices. The voting guidelines provide a
principled basis for voting decisions, but also take account of company-specific factors. In the
Bank's dialogue with the largest companies, governance and sustainability topics relevant to
long-term return are raised. This includes risks and opportunities associated with climate
change, and the Bank expects companies to integrate material climate risks into their strategies,
risk management and reporting.
Third, investing sustainably: The Ministry of Finance has given us dedicated environment-related
mandates. Going forward, these mandates will include investments in unlisted infrastructure for
renewable energy. Next, in certain cases we divest from companies that impose substantial
costs on other agents, with the aim of reducing the fund's exposure to unacceptable risks.
Finally, our political authorities provide guidelines that specifies that certain investments should
be excluded from the fund due to ethical concerns. These exclusions include companies
responsible for large-scale environmental damages, and companies whose business models
relies heavily on thermal coal. .
Specific central bank challenges in policy portfolio management
Aside from the GPFG, Norges Bank, as other central banks, also manages policy portfolios. The
Bank's foreign exchange reserves amounted to USD 64 billion at end-June 2019, divided into a
80% fixed-income portfolio and a 20% equity portfolio. The equity portion is invested in around
1,500 companies worldwide, with a focus on the larger markets and currencies, and managed
according to similar principles governing responsible investment in the GPFG.
The investment of the major part of the FX reserves is to a high degree determined by our central
banking policy objectives. Consequently, we face specific challenges in any extension of
responsible investment practices. First, this relates to respecting our legal policy mandate in the
investment of our FX portfolio. Second, our investments must take due account of liquidity needs
for monetary and financial stability purposes, as well as international financial commitments to
the IMF. Third, we need to be vigilant to safeguarding independence and preventing conflicts of
interest. And finally, while we are a transparent central bank, we need to strike a considered
balance between transparency and remaining needs of confidentiality, to avoid undermining our
primary policy objective.
International cooperation
To conclude, like in other policy areas, there is a crucial role to play for international cooperation
also in the field of climate risk. Norges Bank became a member of the NGFS in December 2018.
The primary objective of this network is to create an arena for central banks and financial
supervisors to exchange experiences and share best practices in developing environment and
climate risk management in the financial sector. We consider this network to be an important
meeting place to arrive at a well-considered understanding of the role and activities of central
banks in this field.