Dutch central bank identifies potential nature risks in its own portfolios

March 15, 2024|Written by |De Nederlandsche Bank

The Dutch central bank has identified potentially high exposure to risks linked to water in two of its investment portfolios, after piloting an assessment method developed by the Taskforce on Nature-related Financial Disclosures (TNFD).

The Locate, Evaluate, Assess and Prepare (Leap) assessment was unveiled by the TNFD last year as part of an evolving framework which can be used by companies and financial institutions to assess their exposure to nature-related risks, as well as the impact of their own operations on nature.

A spokesman for De Nederlandsche Bank (DNB) told Green Central Banking that this was the first time a central bank had applied the Leap method to its own portfolios.

DNB applied the Leap method to two of its global developed markets equity portfolios: the passively managed Broad-Market Fund, and its actively managed portfolio aligned with the Paris Agreement.

“First, we performed a high-level scan of potential nature-related risks in these portfolios on a sector-by-sector basis. We then decided to zoom in further on one sector: energy utility companies,” DNB said in a paper detailing its analysis.

This sector warranted a closer look because power plants are highly dependent on nature – they use large amounts of water for cooling – and because they have a major impact on nature through CO2 emissions, pollution and other environmental factors.

The energy sector is also a good example of how climate and nature impacts do not always overlap, DNB noted. It pointed to the example of hydropower plants, which have a relatively low carbon footprint but may be harmful to the environment in other ways, for example by changing the course of rivers.

The study found that both of the investment portfolios “potentially have high water-related impacts and dependencies on nature”.

DNB noted the limitations of some of the data used for the assessment, with some calculations based on sector averages when company-specific data could provide a very different picture.

The use of the TNFD’s Encore tool is likely to result in an underestimation of the real extent of nature-related financial risks, the analysis pointed out, as it only takes into account companies’ direct linkages with nature rather than the entire value chain.

The central bank described the exercise as “a first step towards exploring nature-related financial risks in its own account investments”, noting that this was “a new field of study” for DNB.

“We will discuss the results of our study with the asset managers of our corporate bond and equity portfolios and ask them how they believe they can manage the risks,” DNB said.

This page was last updated March 15, 2024

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