Resumo

Effective risk management, including risk identification, measurement and control, is essential for efficient operation on financial markets. Even though proper risk management is essential for efficient investment management, Environmental Risk Analysis (ERA) is incipient in the financial investment sphere, especially among Central Banks (CBs). The management of environmental risks has not been a primary objective of the International Reserves (IR) management (NFGS, 2018 and 2019). However, the environmental risks are beginning to be understood as sources of relevant financial risks.

The ERA is prominently linked to the Strategic Asset Allocation (SAA) by means of the common time frame i.e. the long-term horizon for the assessment. In this context, the question that this research seeks to address is how to consider environmental risk in the SAA of IRs. For that, this study also discusses climate physical and transition risks to which CBs are exposed as managers of the IRs. The objective of this study is to address how to consider environmental risk in the SAA of IRs.

Evidence indicates that environmental factors are resulting in business, market, credit, and legal risks. All these risks have financial implications that can be non-linear and disruptive (TCFD, 2017; Bank of England, UNEP and CISL 2017; G20 GFSG, 2016). According to G20 GFSG (2017), ERA contemplates risk identification (financial analysis of environmental factors), analysis (pricing and implications to investment portfolio) and management (actions to mitigate or transfer risks). Failures in ERA could lead to mispricing of assets, mistakes in capital allocation and exposure to stranded assets.

Literature review and analysis of specialized reports from praxis. historical evolution of the environmental sustainability and green finance areas to select the appropriate studies for review. First, the authors analyzed the historical evolution of the environmental sustainability and green finance areas to select the appropriate studies for review. Additionally, the literature review included the publications of the 22 universities members of the Global Research Alliance for Sustainable Finance and Investment (GRASFI). Finally, additional research was conducted in Scopus using the key terms.

The environmental risks to which the investment portfolios of CBs are exposed (section 2) need to be assessed and quantified to enable their management (section 3). For this purpose, a multicriteria analytical model for the evaluation of these environmental risks was developed. The output of this ERA model, which is compatible with the investor profile of the CBs, is an input to the IRs Traditional SAA Model and to the Strategic Green Asset Allocation (SGAA) Model, as outlined in figure 9.

This study discussed the environmental risk exposure of IRs and developed a multicriteria analytical framework to consider environmental risk in the SAA by CBs. The study is relevant to the construction of the investment portfolio of the IRs because of the different angles that must be considered in the selection of countries and instruments. The main argument is that ERA should be included in the traditional approach for SAA in CBs. Therefore, each viable portfolio should also be evaluated based on an environment risk analysis.

Andreeva, N, Voysey, A. (2016); Bank of England, UNEP and CISL (2017); Battiston and Monasterolo (2019); Benedetti et al (2019); Bolton et al (2020); Cahen-Fourot et al (2019); Caldecott, Tilbury and Carey (2014); Campiglio et al (2018); CISL (2015); Dafe and Volz (2015); Dietz et al (2016); IPCC (2013 and 2014); FTSE Russel (2019); G20 GFSG (2016 and 2017); McKinsey (2020); Moody´s (2016); Lamperti et al (2019); Mercer (2011); NGFS (2020)a; NGFS (2020)b; Scott, Huizen and Jung (2017); TCFD (2017) and Scott, Huizen and Jung (2017); Volz (2017); UNEP-FI (2019); WRI and UNEP-FI (2015).