RBNZ Leads the Way in Sustainable Investing of FX Reserves

By Sophia Rodrigues

The Reserve Bank of New Zealand is the first central bank to invest its foreign exchange reserves in a climate-friendly investment option.

Earlier Friday, the RBNZ announced it has invested US$100 million in green bond fund, an open-ended fund launched by the Bank of International Settlements on Thursday.

The fund will be managed in-house by BIS Asset Management and will invest in bonds with a minimum rating of A- and which comply with the International Capital Market Association's Green Bond Principles and/or the Climate Bond Standard published by the Climate Bonds Initiative. 

Such bond issuers would be sovereign, agencies, supranational and covered bonds issuers under the BIS Investment Pool structure.

The RBNZ is funding the investment from its foreign exchange reserves portfolio. Total foreign exchange reserves held by the RBNZ stood at NZ$19.7 billion at the end of August, including NZ$10.7 billion that could be used for forex intervention.

Central banks are playing an increasingly active role in promoting the move towards a sustainable global economy. Recently the Network for Greening the Financial System (NGFS) was established, which brings together around 40 central banks, supervisory agencies and international financial institutions to develop a coordinated response to climate-related risks in the global financial system.

According to a BIS survey, most central banks do not currently include sustainability considerations in the pursuit of their policy objectives but over half of the institutions in surveyed said there is scope to include sustainability as a fourth reserve management objective without necessarily adjusting mandates.

The RBNZ appears to be such a central bank. They didn’t adjust their mandate to include sustainability in managing reserves but in December last year published their climate change strategy that reflects their commitment to mitigate the effects of climate change.

The green fund launch came after the BIS did a detailed study on how well green bonds meet the desirabale liquidity, safety and return characteristics that are needed to be reserve assets.

On liquidity, the research concluded that green bonds may not be eligible for the liquidity or working capital tranches of central banks' reserve portfolios, and for inclusion in investment tranches, the market's still limited size would be a contraint Central banks would thus have to limit the size of their allocations, BIS said.

But in terms of safety and return, the report said investment in green bonds would not seem to subject reserve managers to higher risk than their conventional alternative.

BIS studied absolute returns for the period between 2014 and mid-2019 which showed US dollar green bonds had an average monthly return of 0.26% while conventional benchmark returned 0.24% and government bond returned 0.19%.

BIS is currently estimating future returns to have a positive spread to returns on 5-year US Treasury bond.

--Email: sophia@centralbankintel.com