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.

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.