Integration of Sustainable Investments in the Management of Foreign Reserves Held by Central Banks

Motivated by both risk considerations, such as the impact of climate changes on asset prices, and the desire to support sustainable investments that contribute to global environmental goals, central banks are stepping towards the integration of sustainable investments in their Foreign Reserves management activity. This can be performed explicitly or implicitly, via a series of channels, such as the investment in labelled bonds, or the intertion of ESG metrics at portofolio level (e.g. portfolio carbon footprint). In the case of central banks, in general, the goal of sustainability can be integrated into the activity of managing reserves, without jeopardizing security and efficiency. The security and yield of green bonds support their incorporation into reserve portfolios, but some constraints could emerge in terms of accessibility and liquidity. Given the oversupply of green bonds in primary markets but reduced trading in secondary markets, the liquidity of green bonds may be limited, especially if investors keep these bonds to maturity. However, the persistence of excess demand should facilitate the sale of such assets, if necessary.