Norway’s sovereign wealth fund has warned of a potential unintended consequence of ESG stress testing by European Union financial watchdogs – it could chase capital away from sectors needing financing to deal with climate change.
Norges Bank Investment Management (NBIM), which runs the NOK20.1trn (€1.73trn ) Government Pension Fund Global (GPFG), made its remarks on the topic in a response to a consultation launched in June by three European Supervisory Authorities on draft joint guidelines for integrating ESG risks in the financial stress tests for banks and insurers.
In a letter accompanying its consultation response, published on Friday, NBIM said supervisors should consider how they incorporated ESG stress test results into supervisory processes and policies.
Carine Smith Ihenacho, NBIM’s chief governance and compliance officer, and Jeanne Stampe, its lead policy adviser, wrote in the letter: “While ESG stress testing is useful to assess the resilience of financial institutions’ capital, liquidity positions, strategy and business model, the results should be used to incentivise rather than penalise climate action.”
“In particular, ESG stress tests should not trigger indiscriminate capital withdrawal from sectors and counterparties that need financing to decarbonise and adapt,” they said.
Instead, stress tests should encourage financial institutions to engage proactively with counterparties on credible transition and adaptation planning, the pair wrote.
The Oslo-based central bank department said this was the approach it adopted itself in its climate action plan.
“We believe that our engage-to-change approach will yield the best financial results for the fund and will also contribute to improved real-world outcomes,” Smith Ihenacho and Stampe said, adding that NBIM engaged with the highest emitters in the GPFG’s portfolio on how they could achieve net-zero emissions by 2050.
“We want to support our portfolio companies in delivering long-term financial value and adapting their business models towards achieving this ambition,” the NBIM leaders wrote.
The draft ESG stress test guidelines have been proposed by the European Banking Authority, the European Insurance and Occupational Pensions Authority and European Securities and Markets Authority as part of the EU’s Capital Requirements Directive and its Solvency II Directive.
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