Building Climate Resilient Portfolios. The Case of the Bank of Japan’s Index-Linked ETF Holdings

and | 28 November 2023
Monetary, Policy Briefs | Tags: Asset Purchases, Central Banks, Climate Risks, Governing Finance, Japan

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Climate risks are financial risks that must be accounted for across all central bank operations and invested asset classes. Like for any other financial institution, all assets that central banks own – e.g., equities, bonds, and asset-backed securities – are exposed to climate risks. This is true for foreign reserves, as well as for domestic asset holdings in the context of quantitative easing, such as those held by the Bank of Japan (BoJ). Given the BoJ’s significant exposure of 37 trillion JPY (247 billion USD) to the Japanese equities market, addressing these risks is urgent and critical.

This policy brief highlights core implications for the BoJ:

• It is in the BoJ’s interest to keep climate-related risks in its monetary policy portfolios in check. Various central banks globally have already started to manage climate risks in their monetary policy portfolios.

• A key step for the BoJ in taking climate risks into account is to consider these risks in its domestic equities portfolio. The climate risk analytics for the Japanese equities market that are required for that are well developed.

• There is a broad offering in climate risk-adjusted Japanese equity indices for the BoJ to address climate risks in its index-linked equities exposure.

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