Climate risk management

The purpose of this policy is to outline the framework for climate risk management at Norges Bank Investment Management (NBIM), which shall include identification, assessment, measurement, management and reporting of climate risk. The policy applies both to absolute and relative risk. The climate risk framework shall support NBIM's overall objectives and investment strategy to ensure a proper balance between business goals and risk appetite.

Issued 29 November 2022
Last updated 29 November 2022

Policy

NBIM shall ensure segregation of duties between a recipient of an investment mandate who shall ensure that climate risk is taken and managed, and an independent risk management function, which shall identify, assess, measure, monitor, manage and report climate risk. NBIM shall follow international best practices in the implementation of this policy, as appropriate.

Definition

Climate risk is defined as the risk of change in market value of the fund as a result of climate change and societal responses to it.

The main dimensions of climate risk are,

  • Physical climate risk, defined as acute and chronic risks arising from climate change impacts and climate-related hazards and,
  • Climate transition risk, defined as those related to the policy, technological, and market responses to reduce net emissions.

Risk measurement

  • NBIM shall apply a variety of complementary methods to measure climate risk. The measurements shall seek to capture climate risk associated with the financial instruments used in the management of the fund.
  • NBIM shall measure the two dimensions of climate risk (physical climate risk, climate transition risk) using different approaches, as relevant. Within each climate risk dimension, the measurement methodology applied should decompose the risk to adequate levels of detail and be measured at regular intervals.
  • To ensure robust risk management processes, internal and externally provided solutions shall complement each other in order to mitigate reliance on a single measurement, process or system.
  • NBIM shall measure fund exposure to climate- and environment-related companies and assets.
  • Stress tests shall be based on a plausible range of climate scenarios. The selection of relevant climate scenarios shall include both moderate and extreme scenarios, including a scenario aligned with a global temperature rise of 1.5oC relative to pre-industrial levels.  

Risk monitoring

  • The risk management function shall independently monitor and assess climate risk and the risk characteristics of the funds under management at a combined fund level.
  • Adequate processes shall be in place to ensure timely and accurate climate risk monitoring. These processes shall also ensure an active dialogue regarding climate risk across investment and risk areas.
  • Climate risk shall be managed through standard setting, investment integration, active ownership, and risk management.

Reporting

  • Climate risk shall be independently reported by the risk management function through standardised risk reporting in a prompt, accurate and consistent manner, based on the risk dimensions of climate risk as defined in this policy.
  • NBIM must document the methods used for measuring climate risk and the results of stress-testing the portfolio against relevant climate scenarios.