Climate change and the green transition affect Danmarks Nationalbank’s work in several ways: First and foremost, they affect our work to ensure stable prices and a stable financial system in Denmark. Like the rest of society, Danmarks Nationalbank needs to adapt. Finally, Danmarks Nationalbank issues green bonds on behalf of the state.
The climate and the green transition affect Danmarks Nationalbank’s ability to fulfil its objectives and tasks
Two of Danmarks Nationalbank’s objectives are to ensure stable prices and a stable financial system. Both these objectives are challenged by climate change and the green transition. For this reason, Danmarks Nationalbank is examining how the climate and the green transition are influencing the Danish economy and financial sector.
The climate and the green transition are changing the economy
Global warming is increasing the frequency of natural disasters around the world. In Denmark, storm surges and heavy rainfall are becoming more frequent. Natural catastrophes abroad can also affect Danish businesses and households through trade. Drought, for example, can increase the price of food and river-borne transport.
Energy supplies are challenged by both climate change and the green transition. Drought can, for example, reduce the production of hydroelectric power and nuclear power – in the case of the latter because nuclear plants have to be cooled. Energy supplies based on solar and wind energy are exposed to changes in the weather. This can lead to more expensive electricity at some times and cheaper energy at others.
A uniform carbon tax on all greenhouse gas emissions is the cheapest way to achieve the Climate Act's objectives of fewer emissions in Denmark. However, carbon taxes and other climate regulations can challenge the earnings of companies with large emissions if the companies do not adapt in time. In worst case, companies can go bankrupt. At the same time, the price of goods and services produced by companies becomes more expensive.
Danmarks Nationalbank keeps a close eye on all the changes in the economy resulting from climate change and the green transition. It is important for us to understand the changes so that we can continue to deliver accurate recommendations on the Danish economy.
New winners and losers - and risk assessments
Given the changing cash flows in society, new winners and losers will emerge among businesses and households. Some homeowners may find that the value of their homes decreases due to increased expectations for investment in energy improvements or because they become disproportionately expensive to heat.
In other words, climate change and the green transition change the risk associated with borrowing money for a specific company or for a specific property purchase. The financial institutions, such as banks, mortgage credit institutions and insurance companies, need to continually take these risks into account if they do not want to risk large financial losses in the future.
Climate change and the green transition are therefore also important for Danmarks Nationalbank’s continual overseeing of the stability of the financial sector. We need to understand the dynamics and potential consequences of the changes so that we can continue to make accurate recommendations to authorities and the financial sector.
Collection of new data and knowledge
A particular challenge with climate change and the green transition is that the scale of the changes is unprecedented in history. There is therefore a lack of historical data on how the changes affect businesses and households. This type of knowledge is necessary to assess climate-related impacts on the economy and the financial sector.
At Danmarks Nationalbank, we are purchasing data on the impact of climate change and the green transition which can be linked to existing financial statistics. We have, for example, compiled statistics for CO2 emissions from the companies in which Danish insurance and pension companies have invested. We will expand the field of experimental climate statistics as data improves and standards evolve.
Danmarks Nationalbank is also a member of Network for Greening the Financial System (NGFS), an international network of central banks and supervisory authorities. Here, Danmarks Nationalbank participates in various working groups to share knowledge and develop best practices for managing climate-related consequences and risks.
How can climate change and green transistion affect financial stability?
Climate change and the green transition will affect the financial sector and even the stability of the financial system. However, there is still a lot of uncertainty about which specific events could affect financial stability.
Danmarks Nationalbank has given its first thoughts on events related to climate change and green transition that could lead to higher risks for Danish credit institutions towards 2034.
From climate-related events to financial risks
As we move towards 2034, climate and transition risks for mortgage credit institutions will be mainly related to the green transition, which institutions can be affected by through changes in regulation and market conditions for their customers. Introducing charges on greenhouse gases can support a transition that is less costly for their customers than other tools.
An example of market-related changes for mortgage credit institution customers could be higher requirements or expectations for the energy efficiency of buildings. This can reduce the mortgage value on loans for homes with a poor energy rating, for example. The value of buildings is the collateral behind a large part of lending by mortgage credit institutions, and if that value falls, their credit risk increases.
Selected publications on climate
The following lists a selection of our publications that deal in different ways with the impact of climate change on the economy.
Sale of green government bonds is co-financing the green transition
A government bond is a loan taken out by the government, where the buyers of the bond (investors) are guaranteed a certain interest rate during the term of the bond until the day on which the government repays its loan.
In the case of green bonds, the amount which the government raises from the sale of the bonds is earmarked in advance for projects linked to the green transition. Such projects include the electrification of the transport sector and the production of renewable energy.
The Danish Ministry of Finance decides on the issuance of green government bonds. At the same time, Danmarks Nationalbank is responsible for the practical handling of the bond issuance in its role as manager of the central government’s debt. In 2022, Danmarks Nationalbank issued green government bonds worth DKK 14.5 billion. The plan is to issue green bonds for max. DKK 10 billion again in 2023.
Det er Finansministeriet, der træffer beslutning om udstedelse af grønne statsobligationer. Nationalbanken har samtidig ansvaret for den praktiske håndtering af udstedelserne qua sin rolle som forvalter af statens gæld. I 2022 har Nationalbanken udstedt grønne statsobligationer for 14,5 mia. kr. Det er planen at udstede grønne obligationer for maksimalt 10 mia. kr. igen i 2023.
Danmarks Nationalbank transitioning in line with the rest of society
With an organisation of approx. 500 employees and operations involving a number of socially critical tasks, Danmarks Nationalbank has a responsibility to reduce its own climate footprint as much as possible. We are doing so through the responsible investment of our financial portfolios and by reducing our own greenhouse gas emissions.
Responsible investment of foreign exchange reserve
Danmarks Nationalbank has a foreign exchange reserve of approx. kr. [500] billion. The foreign exchange reserve is primarily placed in short-term money market products (including deposits with foreign central banks) and foreign government bonds. In addition, a small part of the foreign exchange reserve is invested in shares and corporate bonds via listed investment funds, so-called exchange traded funds (ETFs).
Our guidelines for responsible investment are based on the general principle that Danmarks Nationalbank complies with legislation, sanctions and conventions to which Denmark has acceded. Moreover, it is our goal that the investments live up to the Paris Agreement.
In 2022, we chose to convert the existing stock of ETFs into ETFs that follow the EU requirements for Paris Aligned Benchmarks (PABs). The requirements include exclusion lists of industries and companies that cannot be invested in, and criteria for the volume of emissions by the companies in relation to their revenue.
Sustainable operations in-house
We continually focus on ensuring that Danmarks Nationalbank’s internal resources are sustainably managed. This happens through environmentally and climate-friendly policies covering procurement, the circular economy, travel and energy management.
We are working to reduce greenhouse gas emissions resulting from Danmarks Nationalbank’s day-to-day operations. In 2020, for example, we achieved our objective of halving Danmarks Nationalbank’s electricity consumption compared to 2010. At the same time, we are look at how we can measure and report on the emissions from our daily operations. A calculation of Danmarks Nationalbank’s greenhouse gas footprint can set the direction for new initiatives to further reduce emissions.
In connection with the renovation of Havnegade 5, our goal is to have the project and the building DGNB-certified at Gold level. This is ambitious, as there are very few examples of restoration and renovation projects of our size and complexity which are certified.
Contract management, IT and procurement
We have environmentally and climate-friendly procurement policies, where the total impact on the environment and climate depends on, among other things, resource consumption in production, consumption behaviour and the resulting amount of waste. In addition, we require suppliers to perform their work in accordance with the UN’s Global Compact principles.
Specifically, we have decided that suppliers of coins and banknotes must be subject to particular scrutiny with regard to the impact of their operations on society. In previous coin and banknote tenders, CSR requirements accounted for 10 per cent when assessing the tenders in question.
The latest IT tender has also incorporated requirements regarding sustainability. Thus, we require our IT suppliers to protect nature and the environment, promote the use of cleaner technology, promote recycling and to limit problems related to the disposal of IT waste.