External asset managers are used to benchmark internal portfolio management and obtain more efficient access to certain asset classes. The SNB was also among the first central banks to adopt a structured approach to managing non-financial aspects, such as ESG risks. How does the SNB factor ESG risks into its balance sheet management? I would like to start with our bond portfolio, which accounts for 80% of our foreign exchange reserves. Most of this portfolio is made up of government bonds. Other bonds, such as corporate bonds, represent 12% of our reserves. Our bond portfolio is actively managed in terms of country selection and weighting. In other words, while we use a combination of broad bond indices, we deviate from these – within pre-set limits – in order to generate a higher return. Our portfolio managers use all the information at their disposal to guide their investment decisions. This comprehensive assessment essentially includes all types of financial risk that may arise in one form or another. Factoring climate risks into risk assessment is therefore an integral part of good portfolio management. In this context, it is worth mentioning that, for some years now, the SNB’s bond portfolio has included green bonds. As their name suggests, these are bonds whose proceeds are used to finance environmental projects. What about our equity portfolio? In our equity investments, we pursue a passive and neutral approach (index-linked management).
Given our country’s climate risk profile and the fact that the bulk of these risks is insured, a climate-related natural disaster is unlikely to threaten the stability of the entire banking system in Switzerland, even if some individual institutions could be affected. 6  According to the National Centre for Climate Services (2018), the number of days with snowfall at altitudes below 800 metres has halved since 1970. For a simulation of the implications of the various modalities for introducing a carbon tax on the Swiss economy, see Marcucci, A. and L. Zhang (2019), ‘Growth impacts of Swiss steering-based climate policies’, Swiss Journal of Economics and Statistics 155(9), pp. 1–13. Page 4/12  Let’s now move on to the second category of climate change risks, transition risks. These include the economic costs and benefits resulting from adjustments to regulations and government policies aimed at decarbonising the economy. Examples are the scrapping of polluting production processes, the growth of investment into researching and developing green technologies, and an unanticipated adoption of new taxes or subsidies. As with any other tax, the introduction of a carbon tax could change the sectoral composition of domestic production in a way that is significant but hard to quantify. That being said, transition risks are above all likely to impact the financial system – through the revaluation of assets. A sudden shift in climate and energy policy could reduce the value of assets in the sectors most affected by the new regulations (e.g. commodities, automotive, heavy industry).