The traditional mandate of central banks, which is to maintain price and financial stability, is inextricably linked to environmental sustainability in the 21st century.

1. Why is the central bank interested in climate?

The National Bank of Slovakia (NBS) is integrating climate change into its operations because it represents a systemic risk that can destabilize financial institutions and trigger severe shocks in the economy.

We distinguish two basic mechanisms in response to the climate crisis:

• Adaptation: Adapting to irreversible changes. Institutional data cites examples such as building defenses against rising sea levels or breeding drought-resistant crops.
• Mitigation: Mitigating the causes of change. This includes reducing greenhouse gas emissions and supporting so-called "sinks" (e.g. afforestation or the agricultural sector). LULUCF – land use and forestry).

Two types are critical for the central bank climate risks:

1. Physical risk: Direct financial losses resulting from extreme events (floods, droughts) that devalue collateral and assets.
2. Risk of transition: Costs associated with the transformation to a low-carbon economy (change in legislation, technological progress), which may lead to a sharp revaluation of assets in emission-intensive sectors.

Effective management of these risks requires a robust governance structure that ensures the translation of climate objectives into investment practice.

2. Decision Hierarchy: From Strategy to Execution

The management of the NBS investment reserves is subject to a strict hierarchical structure. It is important to emphasize that although the governance process is clearly defined, As of mid-2024, the NBS does not have an officially approved separate strategy regarding ESG and climate risks; this is currently the subject of internal expert discussions and approval processes.

This governance system is not based solely on internal regulations, but reflects global standards and best international practice.

3. Strategic framework and international cooperation

The NBS does not act in isolation. Its climate stance is shaped by its membership in key groupings, which allows it to implement harmonised approaches across the EU.

1. NGFS (Network for Greening the Financial System): Membership since 2019 provides NBS with a direct communication channel for global best practices. Benefit: The possibility of using global climate scenario models for the domestic financial market.
2. Eurosystem: 2021 Common Position on Sustainable Investment. Benefit: It ensures that the NBS proceeds in a consistent manner with other central banks in the euro area when greening portfolios.
3. TCFD (Task Force on Climate-related Financial Disclosures): Standard for disclosure of information. Benefit: It increases transparency and builds investor confidence in the NBS's preparedness for climate shocks.

NBS Climate Pledge (2021) and its impacts:

• Setting expectations in sight: This step directly forces the Slovak financial sector (banks and insurance companies) to standardize their own risk reports.
• Reducing your own carbon footprint: The bank serves as an institutional example (lead by example) for other Slovak market participants in the area of decarbonization of operations.

The bank is smoothly moving from strategic commitments to the use of specific instruments, while expanding the scope of its portfolios.

4. Green bonds as a tool for change

In recent years, NBS has significantly expanded the scope of its investments. The original focus only on bonds in euros has evolved into the management of portfolios in foreign currencies (USD, CAD, AUD, etc.) and also includes a stock portfolio in the form of ETFs. The key tools of the transformation are green bonds, whose volume in the NBS portfolios in 2023 reached €265 million (3.5 % share of all bonds).

Institutional data reveals the complexity of asset selection: NBS holds green bonds from a South Korean power company in its portfolio. This company is paradoxically responsible for 77 – 90 % Total Carbon Emissions (TCE) within the NBS Corporate Bond asset class.

Why is the bank holding them? These securities are purpose-bound to specific environmental projects. At the same time, however, this example illustrates the extreme concentration risk – at the time of reporting, these bonds were the only ones green instruments in a given corporate class. For a finance student, this means that even „green“ investing requires in-depth analysis at the issuer level.

The effectiveness of such investments must be supported by exact metrics that the NBS regularly reports.

5. Measuring Success: Key Climate Indicators (KPIs)

According to TCFD standards, the NBS uses three basic metrics. For professional practice, it is necessary to distinguish the calculation methodology by type of asset (government vs. non-government).

Expert insight into the LULUCF sector: The NBS reports emissions including and excluding the LULUCF sector for government bonds. The data confirms that emissions are lower when LULUCF is included because the forest areas of the countries in the portfolio act as natural sinks, which reduces the net carbon footprint.

The trend in 2021-2023 indicates a gradual improvement in most indicators, reflecting the decarbonization of portfolios.

6. The path to climate neutrality by 2050

The long-term strategic goal of the NBS is to achieve, within its investment activities, carbon neutrality by 2050 at the latest, in full compliance with the Paris Agreement. However, the path to this goal is not straightforward and requires addressing technical challenges:

• Data gaps: While government bonds and stocks have almost 100% coverage with climate data, supranational and agency bond coverage falls below 50 %, which makes accurate measurement difficult.
• Time lag: There is a natural lag between the release of financial statements and official emissions data, which requires additional modeling and retrospective revisions of reports.
• Revision of standards: The dynamic development of methodologies within the Eurosystem requires continuous adaptation of internal risk measurement systems.

Transparent disclosure of this data is a key tool for the NBS to build trust and stability in a transforming economy. JRi&CO2AI