The earth is gradually becoming warmer. Global warming leads to more extreme weather events and gradually rising sea levels. The goal of the Paris Agreement is to limit global warming to 2°C and preferably not more than 1.5 °C. To achieve this, greenhouse gas emissions must be cut sharply. Norway has committed to reducing emissions by at least 50% of 1990 levels by 2030 and aims to be a low-carbon economy in 2050. Meeting this objective requires an economic transition – through policy measures, changes in
preferences and technology. 

Climate risk, ie uncertainty associated with future, unexpected climate-related events, has long been on the agenda in the management of the Government Pension Fund Global (GPFG). Work on climate-related topics is a more recent initiative for the rest of the Bank and there is still a great deal we do not know about the economic and financial consequences of climate change. Increasing Norges Bank’s expertise on climate-related issues will be in focus across all the Bank’s tasks and mandates in the period ahead. 

Climate change and monetary policy

Climate change and adjusting to a low-carbon economy affect large parts of the Norwegian economy and thereby monetary policy. Climate change may lead to more extreme weather events, such as periods of drought and flooding, which can destroy crops, buildings and infrastructure. Measures to slow global warming may also affect the structure of the economy. Policy measures, such as higher carbon prices, may for example influence both overall inflation and activity in a number of sectors. 

Norges Bank is working on advancing the level of expertise and understanding of how climate-related changes influence the macroeconomy and monetary policy, both internally and through international cooperation. In 2020, Norges Bank contributed to the Network for Greening the Financial System’s (NGFS) report Climate change and monetary policy: initial takeaways. Norges Bank’s Regional Network also had a special feature entitled, Climate-related adjustments in the business sector. There were blog posts on Bankplassen.no and a research project with the title, Climate risk and commodity currencies.

Climate risk and financial stability

Climate change and the transition to a lowcarbon economy will be one of the greatest challenges facing Norwegian firms in the years ahead. Borrowers who are unable to tackle these changes adequately will pose risks to the banking sector. 

Norwegian banks are primarily exposed to transition risks through lending to firms with high emissions that thus risk being subject to higher taxes or having to depreciate assets. Four sectors stand out as sources of high emissions: transport, manufacturing, international shipping and oil-related industries. These sectors account for a moderate share of Norwegian banks’ lending. 

Physical risks are also relevant for Norwegian banks. In climate models focusing on a higher average global temperature, Norway is one of very few countries that might experience a productivity increase if the temperature rises. This does not mean that Norway is insulated against the negative effects of physical climate change. First, Norway is also affected by the increase in extreme weather events caused by a higher temperature. Second, climate change could entail changes in local climate and biological systems that could have unforeseen consequences. Furthermore, Norway will be affected via the impact of climate change on more vulnerable countries. Norwegian banks must also be prepared for the possibility that their exposures may also be affected indirectly.

Climate change is a global challenge that must primarily be addressed by the political authorities, using instruments other than those available to central banks. Central banks and supervisory authorities can, within their mandates, promote financial stability by ensuring that the financial sector includes climate risks in risk assessments and communicates relevant information and ensuring that all risks are backed by sufficient
capital.

Furthermore, Norges Bank is planning to conduct a more quantitative assessment ofclimate risk for Norwegian banks. The Bank is also closely following international work on new reporting requirements and continues to
participate in the NGFS workstream on financial stability.

See further discussion in Financial Stability Report 2020.

Responsible investment, Government Pension Fund Global (GPFG)

The GPFG is required to be a responsible investor. The Executive Board has laid down principles for responsible investment at Norges Bank. Responsible investment supports the GPFG’s objective of the highest possible return over time within the limits of the management mandate in two ways: first, by promoting long-term economic
development through the GPFG’s investments, and second, by reducing the financial risk associated with the
environmental and social conduct of the GPFG’s investee companies. Corporate governance, the environment and social conditions that could have an impact on the GPFG’s return over time are also assessed. This is integrated into the GPFG’s work on standards and into its active ownership and investment activities. 

The Ministry of Finance has established guidelines for the observation and exclusion of companies from the GPFG. The guidelines contain criteria for exclusion based on companies’ products or on conduct. The Council on Ethics and Norges Bank are responsible for following up these guidelines. Decisions on the observation and exclusion of
companies from the GPFG are made by Norges Bank’s Executive Board, based on recommendations from the Council on Ethics. The Council on Ethics is an independent body established by the Ministry of Finance.

The investment management mandate requires responsible investment to be an integral part of the management of the GPFG. The GPFG is tasked with safeguarding and building financial wealth for future generations. The GPFG’s long-term return is dependent on sustainable growth, wellfunctioning markets and good corporate
governance. Responsible investment is also included in Norges Bank’s annual report on the management of the GPFG. The Bank’s work on responsible investment can be divided into three main areas: 

1. Setting standards
2. Exercising ownership rights
3. Investing responsibly

Network for Greening the Financial System (NGFS)

In December 2018, Norges Bank became a member of the NGFS. The NGFS is a network for central banks and supervisory authorities for sharing knowledge on how financial authorities and the financial sector should take
environmental and climate risk into account. Norges Bank participates in the workstreams on macrofinancial conditions and on monetary policy and sustainable financial conditions.

Reports from the NGFS

NGFS has published many reports about climate risk, financial stabiliaty and macro economy. 

See NGFS' website for more information