Financial Risk Management and Climate Change Risk: The Experience in a Central Bank (Contributions to Finance and Accounting)

Foreword
Acknowledgements
Contents
Editor and Contributors
Financial Risk Management and Climate Change Risk
	References
Part I: Monetary Policy and Financial Risk Management
	The Cost of Unconventional Monetary Policy Measures. A Risk Manager´s Perspective
		1 Introduction
		2 Data
			2.1 Exposure
			2.2 Probability of Default
		3 Methodology
			3.1 Calculation of Losses
			3.2 Simulation
			3.3 Calibration
		4 Results
			4.1 Securities Market Programme (SMP)
			4.2 Outright Monetary Transactions (OMT)
			4.3 Asset Purchase Programme (APP)
			4.4 Pandemic Emergency Purchase Programme (PEPP)
			4.5 Trasmission Protection Instrument (TPI)
		5 Conclusions
		Appendix
			A. Robustness Analysis
			B. Further Methodology Details
				Simulation of Collateral
				ELA Operations
				Probability of Default for Covered Bonds and ABS
			C. Dataset and Software
		References
	The Eurosystem Collateral Framework and the Measures Introduced in Response to the Pandemic Emergency
		1 The Role of Collateral in Monetary Policy Transmission
		2 The Eligibility Criteria for Collateral and the Credit Assessment Sources
		3 The Risk Control Framework
		4 The Use of Credit Claims as Collateral for Eurosystem Credit Operations
		5 The Measures Adopted by the ECB During the Covid-19 Crisis
		6 The Expansion of the Bank of Italy´s ACC Framework in Response to the Covid-19 Emergency
		7 The Effects of the Collateral Easing Measures in Italy
		8 The Benefits and Costs for Italian Counterparties
		9 The Gradual Phasing-Out of the Pandemic Collateral Easing Measures
		References
	Sovereign Ratings
		1 Introduction
		2 Italian Sovereign Ratings: An Overview
		3 Sovereign Rating Methodologies
			3.1 Models, Indicators, Rules
			3.2 Membership of a Monetary Union
		4 The Drivers of the Ratings Assigned to Italy
			4.1 The Quantitative and Qualitative Drivers of Sovereign Ratings for Italy
			4.2 Comparison Across Italy´s Model Ratings
			4.3 Factors Potentially Underweighted in the Four Agencies´ Analyses
			4.4 Official vs. Model Ratings for Euro Area Countries
		5 Conclusion
		Annex 1
		Annex 2
		Annex 3
		Annex 4
		References
	The Bank of Italy´s In-House Credit Assessment System for Non-financial Firms
		1 The Bank of Italy´s ICAS
		2 The Eurosystem Credit Quality Standards
		3 Bank of Italy´s In-House Credit Assessment System´s Architecture
			3.1 Aims and Governance of the System
			3.2 Definition of Default
			3.3 Input Data and Collection Process
		4 The BI-ICAS Process for Calculating the PD
			4.1 The Statistical Model
			4.2 The Expert Assessment
		5 The Model Validation
			5.1 The Role of the Validation
			5.2 Expert System Validation
			5.3 Bank of Italy´s Internal Backtesting Analysis: Results for 2021
		6 Usage, Coverage and Rating Distribution of BI-ICAS System
			6.1 Main Features of the Companies Assessed by BI-ICAS with a Full Rating
			6.2 The Evolution of Credit Risk Across Firms Assessed with BI-ICAS
			6.3 The Contribution of BI-ICAS to Monetary Policy Refinancing in the Covid-19 Crisis
		7 Conclusions
		Appendix 1
			Statistical Module Validation
				Discriminating Power Analysis
				Predictive Power Analysis
		Appendix 2
			Validation Analysis of the Expert Module
				Effects of the Expert System on the Risk Classes Attributed by the Statistical System
				Influence of the Six Analysis Profiles on the Final Judgment for All Analysts
				Role of the Second Analyst
				Relationship Between the Expert System and the Statistical Risk Class 12 Months Later
				Differences in the Behaviour of the Analysts in Judging the Profiles and in Assigning the Final Ratings
				Analysis of Defaults
		References
	The Role of Rating Agencies: Implications for the Financial System and Central Banks´ Efforts to Reduce their Reliance
		1 Credit Ratings, the Financial System and Monetary Policy: An Overview
		2 The Impact of Rating Actions on the Financial System and the Real Economy
			2.1 Sovereign Issuers
			2.2 Banks
			2.3 Insurance Companies and Asset Managers
			2.4 Central Counterparties and Collateralised Markets
			2.5 Non-financial Companies
		3 Reducing the Eurosystem´s Reliance on Credit Rating Agencies: Progress Made So Far
			3.1 The Role of Credit Ratings in the Eurosystem´s Collateral Framework
			3.2 The Use of Credit Ratings for Monetary Policy by Other Major Central Banks and Recent Changes in Response to the Covid-19 ...
			3.3 The Recent Policy Debate
			3.4 Reducing Reliance on Credit Rating Agencies: Progress Made So Far by the Eurosystem
		References
	The Incorporation of Climate Change Risk in the Eurosystem Monetary Policy Framework and the Decarbonisation of the Corporate ...
		1 Introduction
		2 Climate Change Considerations in the ECB´s Monetary Policy Strategy (July 2021)
		3 The Measures to Incorporate Climate Change into the Eurosystem´s Monetary Policy Operations (July 2022)
			3.1 The Acceptance of Sustainability-Linked Bonds as Collateral
			3.2 The Introduction of Collateral Pool Limits for Issuers with a Large Carbon Footprint
			3.3 Disclosure Requirements for Collateral
			3.4 Risk Assessment and Management
		4 The Actions Aimed at Decarbonising Corporate Bond Holdings
			4.1 Communication
		5 Conclusions
		References
Part II: The Integration of Climate Change in Financial Risk Management
	The Commitment to Sustainability in Financial Investments
		1 The Concept of Sustainability
		2 The Threat of Climate Change
		3 The Relevance of Sustainability for Financial Investments
		4 The Main Initiatives of International and European Authorities Toward Sustainable Finance
		5 Trends in Sustainable Finance
		6 Climate Risks and the Role of Central Banks
		7 Central Bank Initiatives
		8 The Bank of Italy as a Sustainable Investor
		9 Conclusions
		References
	The Strategic Allocation and Sustainability of Central Bank Investments
		1 The Strategic Asset Allocation
		2 Capital, Investments, and the Integrated Balance Sheet
		3 The Scenario Generation Model
			3.1 Methodology
			3.2 The SAA Simulation Model
		4 Portfolio Optimization
			4.1 The Objective Function
			4.2 Optimization Constraints
		5 The SAA: An Application
		6 Sustainability Principles and Investment Decisions: The Experience of the Bank of Italy
			6.1 The Integration of Sustainability Principles
			6.2 Sustainability in the Management of Securities Issued by the Private Sector
		7 Conclusions
		Appendix: The Evolution of the Bank of Italy´s Financial Assets
		References
	Machine Learning, ESG Indicators, and Sustainable Investment
		1 Introduction
		2 Literature Review
			2.1 Risk Factors for Equity Returns
			2.2 Sustainable Investment: Foundations and Issues
			2.3 ESG: The Silver Bullet for Sustainable Investment?
			2.4 Machine Learning in Finance
		3 Data
			3.1 Returns and Indices
			3.2 ESG Data
				Refinitiv-Asset 4
				MSCI
			3.3 First Trials with Standard Approaches
		4 A Tailored Machine Learning Approach
			4.1 The Proposed Approach
			4.2 Tree-Based Approach, the General Idea
			4.3 Training the Trees
		5 Results
			5.1 Results for ESG Indicators
			5.2 Results for Environmental Indicators
		6 Conclusions
		Appendices
			Appendix 1: Portfolios Obtained with ESG Indicators
			Appendix 2: Portfolios Obtained with Environmental Indicators
		References
	The Global Green Bond Market
		1 Introduction
		2 Literature Review
		3 Data
			3.1 Identification of ESG Bonds
			3.2 Information on Securities
		4 ESG Bond Supply
		5 Italian Residents´ Holdings of ESG Bonds
		6 ESG Bond Yields and the Greenium Puzzle
		7 Conclusions
		Appendix: Information Sources
		References
	The Exposure of Investments to Climate and Environmental Risks
		1 Introduction
		2 The Exposure of Government Bonds to Climate and Environmental Risks
			2.1 Backward-Looking Indicators: Emissions and the Energy System
			2.2 Forward-Looking Indicators: From Historical Emissions to Decarbonization Scenarios
			2.3 Environmental Risk Exposure Indicators
			2.4 The Climate and Environmental Indicators for Some Countries
		3 Climate and Environmental Indicators for Corporate Sector Entities
		4 The Carbon Footprint and Exposure of Financial Portfolios
		5 The Climate and Environmental Risk Exposure of the Bank of Italy´s Investments
			5.1 The Bank of Italy´s Foreign Reserves and Investment Portfolio: Objectives and Composition
			5.2 Government Bonds
			5.3 Corporate Sector Securities
		6 Conclusions
		References
Disclaimers
Glossary and Abbreviations