The management of foreign exchange reserves of the National Bank of Slovakia (NBS) is strictly anchored in Act No. 566/1992 Coll., which imposes on the institution the obligation to manage foreign exchange values while respecting the rules of the Eurosystem. However, from the perspective of a quantitative strategist and risk manager, The traditional parameters of reserve management – safety and liquidity – are now facing a new paradigm. Climate risks are no longer seen as externalities, but as endogenous factors that can fundamentally disrupt the primary objective of safety and availability of liquidity in the event of systemic stress events defined by the NGFS (Network for Greening the Financial System) scenarios.

1. Strategic framework and mandate of the NBS in the context of the Eurosystem

The integration of NBS into the NGFS network (2019) and the adoption of the commitments from COP26 in Glasgow transformed a conservative, reactive approach into a proactive sustainability management model. This shift is not only an ethical gesture, but an analytical necessity: physical and transition risks are directly correlated with market price volatility and the credit quality of the issuers in the portfolio.

Key objectives of NBS reserve management and their climate dimension:

• Liquidity: Ensuring the immediate availability of funds (mainly in USD) for Eurosystem operations. The climate dimension consists of monitoring risk, where a sharp revaluation of „brown“ assets could limit market liquidity of specific asset classes in stress scenarios.
• Safety: Protection of the fair value of reserves. Risk management focuses on mitigating exposure to transition risks that could lead to asset impairment of entities unprepared for a low-carbon economy.
• Yield: Maximizing long-term returns within a risk framework. Climate factors serve as an alpha generator in identifying issuers with sustainable business models that are more resilient to regulatory shocks.

This framework requires rigorous reporting according to TCFD (Task Force on Climate-Related Financial Disclosure) standards, which forms a methodological bridge to accurately quantify the carbon footprint of financed emissions.

2. Methodological deconstruction of carbon indicators (WACI, TCE, CF)

Data transparency is a fundamental prerequisite for modeling future shocks. NBS uses granular data from experts ISS (Institutional Shareholder Services) and Carbon4 Finance (C4F) to deconstruct the environmental profile of the portfolio through three key metrics:

• WACI (Weighted Average Carbon Intensity): It presents a perspective „"from the outside in"“ (financial significance). It normalizes an issuer's emissions by its revenues, indicating how sensitive the portfolio will be to the introduction of a carbon tax or a change in relative energy prices.
• TCE (Total Carbon Emissions): Offers perspective „"from the inside out"“ (environmental footprint). It measures the absolute volume of emissions in tCO2e per NBS share of enterprise value (EVIC). It is a key indicator for monitoring compliance with the decarbonization trajectory.
• CF (Carbon Footprint): It normalizes TCE per million euros invested. It is essential for comparability over time because it eliminates the distortion caused by the growth of the total portfolio volume.

Comparison of methodological approaches for government issuers

3. Analysis of exposure and impact of high-carbon issuers on stability

In the period 2021-2023, the market value of the portfolio increased by 16 % (from €7,315 million to €8,526 million), which was determined by the new investment strategy of November 2023. However, this dynamic brought with it specific concentration risks, which are best illustrated by the analytical paradox of the South Korean power company.

Emission concentration warning signal: This entity and its subsidiaries accounted for only 1,5 % non-government portfolio of the NBS, but generated disproportionate 77 % total carbon emissions (TCE) in this category. In 2021, this concentration was even at the level of 90 %.

From a risk management perspective, this is a critical vulnerability. Any sudden change in carbon pricing in the Asian region or a sectoral shock in the energy sector could trigger a disproportionate drop in the value of the non-government portfolio. However, the strategic nuance remains the fact that this entity is also responsible for 100 % green bonds within the corporate bond class NBS. The NBS is thus in a position to effectively finance the transformation of a high-polluting entity, which is in line with mitigation objectives, but requires rigorous monitoring to prevent stranded assets.

4. The role of green bonds and equity portfolios in the risk profile

In response to climate challenges, the NBS has significantly adjusted its asset allocation. The share of equity ETFs has increased from 5.4 % in 2021 to 10.7 % in 2023, which reflects the effort to participate in the growth of low-emission segments of the global market.

A key stabilizing element are green bonds, the volume of which in the portfolio has increased by 143 %, reaching a value of €265 million. Although these securities do not immediately reduce the issuer's TCE (as the emissions are reported at the entity level), they finance specific adaptation projects that reduce the portfolio's long-term physical risk.

Contribution of asset classes to decarbonization:

• Covered Bonds: With a share 42,8 % (2023) represent the most significant and at the same time the most stable part of the portfolio with minimal carbon intensity.
• Stocks (ETFs): A strategic tool for actively reducing WACI through the selection of low-emission benchmarks. The dynamic growth of this class allows for diversification of climate risk across sectors.
• Government bonds: Targeted purchases of bonds from countries with a progressive emission profile (Germany, Great Britain) in 2022 and 2023 directly contributed to reducing the normalized carbon footprint.

This mix transforms reserves into active capital supporting the global trajectory towards carbon neutrality by 2050.

5. Strategic recommendations for investment risk management

Based on ESMA's methodology and Eurosystem expectations, I propose a transition from static monitoring to dynamic climate risk management:

Application of negative screening

It is necessary to formalize restrictions on entities with extreme TCE that do not represent adequate investment weight. The case of the South Korean power plant confirms that selectively reducing exposure to a marginal number of hyper-pollutants can radically improve the risk profile of a portfolio without compromising overall diversification.

Implementation of climate benchmarks and dynamic modeling

In line with ESMA's findings, the NBS must integrate dynamic modeling of climate shocks. The risk lies not only in the collapse in the prices of „brown“ assets, but also in secondary effects, where massive investor outflows from funds can exacerbate the decline in the value of assets in the NBS portfolio during a climate shock. It is recommended to accelerate the transition to equity ETFs linked to „Paris-Aligned“ indices.

Monitoring greenwashing and reputational risks

ESMA has identified that controversies related to greenwashing are currently concentrated mainly in financial sector. The NBS must implement a robust monitoring system for external ETF managers and issuers to eliminate reputational risk and potential volatility associated with overstated ESG claims.

Future trajectory and decarbonization goals

The analysis confirms that the implemented NBS strategy is delivering measurable results. non-governmental issuers we have made significant progress: WACI decrease by 58 % a decrease in carbon footprint (CF) by 55 % compared to the base year 2021. This trend is fully consistent with the commitment to keep global warming below the 1.5 °C.

I consider it important to emphasize that the presented indicators may be different in future periods. retroactively revised due to time lags in reporting emission data from third parties (data lags). This methodological caution is necessary to maintain the NBS's status as a credible and conservative risk manager. Transparent reporting of climate risks remains a fundamental pillar of the stability of foreign exchange reserves in the era of ongoing energy transformation. JRi&CO2AI