The equity portfolios of Dutch pension funds and insurers have become significantly “greener” over the 2017-2020 period. This is mainly because investee companies have emitted less carbon over that period, according to an analysis by De Nederlandsche Bank (DNB), supplementing experimental indicators on climate change and the financial sector published today in tandem with the European Central Bank (ECB).
DNB has conducted an in-depth analysis into the carbon footprint that can be attributed to the investments of Dutch pension funds and insurers (see link below). The preliminary figures show that the absolute carbon footprint (financed emissions) from the equity portfolios of these institutional investors decreased in the period 2017-2020. Overall, the reduction during this period came to 36% for pension funds and 40% for insurers, although no adjustments have yet been made for price effects.
While this decrease is partly due to investment portfolio reallocations, for example by investing more in cleaner companies instead of high-emission firms, its main cause is the fact that investee companies have reduced their carbon emissions. For pension funds, two-thirds of the drop in absolute footprint was caused by lower emissions by investee companies. For insurers, the part of the decline attributable to the greening of underlying securities is smaller.
The companies in which pension funds and insurers invest follow wider trends: although emissions did not decrease globally over the period 2017-2020, falling carbon emissions can be seen in the European Union, the United States and Japan, countries where Dutch pension funds and insurers invest the most. Part of the drop in carbon emissions at companies in the last year of the analysis (2020) can probably also be ascribed to COVID-19-related effects.
The total equity portfolios of Dutch pension funds and insurers amounted to €550 billion and €15 billion, respectively, in 2020, including equity investments through investment funds.
In terms of weighted average carbon intensity (see text box), which is a relative measure, the reduction is roughly the same for pension funds and insurers. The in-depth analysis explains the extent to which the greening of companies and investment policies have an impact on the figures.
We measure the carbon footprint of the financial sector both in absolute numbers (financed emissions) and in relative numbers (weighted average carbon intensity, or WACI).
Financed emissions, or absolute carbon emissions financed by financial institutions, are calculated based on the ownership perspective. A company's reported annual carbon emissions are allocated to a financial institution in proportion to the part of the activity it finances. For equities, this ratio (or weight) is calculated by dividing the financial institutions’ exposure by the company's value, i.e. the market capitalisation weight in this study. This absolute indicator is the most indicative of total emissions from the financial sector. However, large differences in invested capital between institutions make this measure unsuitable for comparing sectors or individual financial institutions. Doing so requires relative measures.
Weighted average carbon intensity (WACI) is the relative carbon emission per million euro of company revenue (carbon intensity), weighted by the investor's portfolio weight. This indicator is relative in two ways: carbon intensity reflects an issuer’s emissions relative to its revenue, and portfolio weight indicates the value of an investment relative to the investor's entire investment portfolio. While this indicator allows for comparing sectors or individual financial institutions, it does not provide information on the absolute level of emissions.
The DNB analysis complements the new sustainability statistics published today in tandem with the ECB, following the action plan established by the ECB’s Governing Council aimed at better incorporating climate change into its mission.
Climate change is significant for the financial sector, not only because it poses risks, but also because the sector can play an important role in financing the energy transition through its investments in companies. Working in unison with euro area central banks, the ECB has now developed its first harmonised standards for sustainability statistics, presenting three types of indicators: one for the carbon footprint of the financial sector's investments and transition risks, one for “physical risks” (such as flood damage) that financial institutions face as a result of climate change, and one for green and sustainable bonds, on which we previously released figures.
Table 4.5: Green bond holdings and issuances
Table 17.1: Carbon indicators for the Dutch financial sector
Table 17.2: Physical risks for the Dutch financial sector
DNB Analysis - Decomposition carbon indicators
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