In Conversation with Ms Wendy Zammit (Head of Financial Stability Surveillance & Research Department, Central Bank of Malta)

1. When and why did your institution join the NGFS? 

The Central Bank of Malta joined the NGFS in July 2019. This marked a key step in its efforts to address climate-related financial risks and support sustainable development. As a small central bank, the NGFS membership has provided access to focused research, best practices, and analytical tools, enabling the Bank to strengthen its internal capacity and work in the direction of aligning its frameworks with emerging international standards.

This decision reflected the Bank’s strong institutional commitment to environmental responsibility and a clear recognition that climate change poses systemic risks to financial and economic stability. In addition, the NGFS membership has enhanced the Bank’s reputation in sustainable finance, bolstering its engagement with both domestic stakeholders and international partners, while supporting Malta’s broader alignment with EU climate and sustainability objectives.

At the national level, Malta declared a climate emergency in 2019 and has made tangible progress on its environmental agenda. In 2024, the Maltese Government established the Climate Action Authority, and earlier this year, submitted an updated National Energy and Climate Plan (NECP) to the European Commission. This plan aligns with the EU’s more ambitious 2030 climate targets under the European Green Deal and the Fit-for-55 legislative package. These developments highlight the growing importance of international cooperation and knowledge-sharing through platforms such as the NGFS in supporting Malta’s climate commitments.

2. Can you share with us the key elements of the Central Bank of Malta’s climate strategy and how it fits into the broader national strategy in your jurisdiction?

The Central Bank of Malta integrates environmental and climate considerations across its strategic and operational objectives, reflecting a clear commitment to sustainability. These efforts align closely with the Eurosystem’s initiatives and support the EU’s overarching goal of carbon neutrality. The Bank is actively working to reduce its ecological footprint and raise environmental awareness within its operations. A cornerstone of its environmental strategy is digital transformation, which supports operational efficiency and emissions reductions. The Bank also contributes to local carbon offsetting through tree-planting initiatives in various locations across Malta.

Beginning in 2021, the Bank has progressively incorporated Sustainable and Responsible Investment (SRI) considerations into the Strategic Asset Allocation (SAA) of its own funds, in line with NGFS recommendations to embed sustainability considerations into portfolio management. As part of the Eurosystem, the Bank is committed to achieving carbon neutrality in its non-monetary policy portfolios by 2050, consistent with the Paris Agreement and the EU Climate Law. To support this, the Bank has implemented a strategy whereby equity investments are increasingly directed toward climate solutions.  Additionally, the Bank applies the EU Paris-Aligned Benchmark (PAB) exclusion criteria to its proprietary corporate bond portfolio and employs norm-based exclusions aligned with the Norges Bank Investment Management (NBIM) exclusion list. The Bank follows an impact investment strategy in its internally-managed fixed-income portfolios, with a focus on green bonds from highly-rated issuers. Annual targets for such investments are set by the Bank’s Investments Policy Committee, subject to market conditions. Further exposure to green bonds is achieved through the Bank’s externally managed portfolios and collective investment schemes. While these do not always yield immediate emission reductions, they support climate mitigation efforts by funding projects that prevent higher emissions.

Since 2023, the Bank has published an annual Climate-Related Financial Disclosures Report for its non-monetary policy portfolios, following TCFD and NGFS recommendations (find the 2023 and 2024 reports here). The report provides transparency on the Bank’s climate-related risks and the environmental footprint of its portfolios. It includes both backward and forward-looking metrics, some of which are used as proxies for transition risk. These metrics are also used to inform decarbonisation actions. Physical risks are monitored and reported to the Bank’s Risk Committee alongside transition risk developments.

In addition to these operational and investment efforts, the Bank leverages its analytical capabilities to support climate-related research and raise awareness within the Maltese financial sector and economy. In 2021, the Bank published a preliminary study on the financial sector’s exposure to high-emission sectors, which was updated in 2023 to address classification limitations and improve visibility of holding company exposures, reaffirming a concentration of exposures in low-CO₂ intensive sectors.

Furthermore, in 2022, the Bank contributed to developing experimental indicators to assess the financial sector’s exposure to physical risks, including extreme weather events and environmental degradation. In 2023, it conducted a survey of local firms, especially those in greenhouse gas-intensive industries, to assess their perception of climate risk and their mitigation strategies. The results provided valuable insights into the private sector’s preparedness for a carbon-neutral economy, highlighting that while awareness and investment in sustainability are increasing, the transition process is likely to be challenging and requires collaborative efforts among stakeholders.    

Over the past three years, the Bank has developed new modelling tools to better capture the various channels through which climate change is expected to impact economic variables in Malta. The primary tool is an energy-augmented DSGE model featuring a highly disaggregated energy sector, enabling the analysis of the green transition’s effects through a detailed fiscal framework that imposes brown taxes on carbon-intensive energy sources while providing subsidies for green investments. This setup is well-suited for estimating the macroeconomic impact of increases in Emissions Trading System carbon prices and for evaluating different fiscal strategies.

A second strand of research focuses on augmenting a Computable General Equilibrium (CGE) model with sector-specific carbon taxes. This approach accounts for the heterogenous effects that climate change mitigation measures are expected to have on the economy, particularly on energy- or carbon-intensive sectors. This CGE model can capture both the direct and indirect impacts on relatively greener sectors, which rely on intermediate output produced in more polluting sectors. The Bank is also developing a model to measure the short-run implications of physical climate change, specifically the effects of short-lived increases in temperature and changes in rainfall patterns on Malta’s gross value added and consumer prices.

Through these evolving initiatives, the Central Bank of Malta plays a key role in driving the transition to a resilient and sustainable financial system and economy.

3. To which extent did the Central Bank of Malta leverage the work of the NGFS in its own domestic journey? Any concrete examples?

The Central Bank of Malta has actively leveraged the work of the NGFS to advance its climate-related agenda. The membership has been instrumental in enhancing the Bank’s understanding and management of climate-related financial risks by providing guidance, practical frameworks, and tools designed specifically for central banks. These resources have complemented the Bank’s engagement within the Eurosystem and supported the development of internal capabilities. 

Participation in NGFS workstreams has been especially valuable. The Bank has actively engaged in the Workstream Net Zero for Central Banks  and the Workstream on Monetary Policy, gaining exposure to international best practices and insights into common implementation challenges. Regular knowledge-sharing webinars have also played a key role in enabling peer learning and fostering collaboration.

One particularly notable area of influence has been the treatment of sovereign exposures in the Bank’s non-monetary policy portfolios (NMPPs). While the Central Bank of Malta currently relies on sovereign issuers to meet their own climate commitments, it has expressed interest in evaluating the feasibility of incorporating climate-related strategies into its sovereign bond holdings. In this context, the Bank welcomed the NGFS’s 2024 publication "Considering Climate-Related Risks and Transition Impact in the Sovereign Investments of Central Banks", which offers much-needed guidance in an area that still lacks clear international standards.

Moreover, upon joining the NGFS, the Bank participated in a task force that helped design the first iteration of climate scenarios for central banks and supervisors. Building on this experience, in 2022 the Bank adapted its Macro Stress Testing Framework to model the financial impact of transition risks, specifically, the introduction of a carbon tax aligned with the Paris Agreement goal of limiting global warming to 1.5°C (see Fourteenth financial stability report (2021), pp. 54-67). The carbon tax was calibrated using oil price assumptions from one of the NGFS scenarios and was used to simulate the effects of a policy shift discouraging fossil fuel use. This scenario-based approach enabled the Bank to assess the resilience of Malta’s banking sector under transition stress by evaluating potential impacts on credit risk, market risk, and overall financial stability. It also allowed the Bank to identify systemic vulnerabilities that could emerge from abrupt decarbonization policies.

In sum, the NGFS has significantly contributed to the shaping of the Central Bank of Malta’s climate-related strategy, both by informing its policy development and by providing a collaborative platform to enhance technical capacity through best practices.

4. One last word?

The transition to a sustainable and climate-resilient economy is both a challenge and an opportunity. For the Central Bank of Malta, it represents a long-term commitment to integrating climate and environmental considerations into all aspects of our mandate, whether in risk management, investment, research, or policy engagement. While our small size presents certain constraints, it also allows us to be agile and focused. Platforms like the NGFS are vital to this journey, and we remain committed to actively contributing to the shared goal of safeguarding financial stability, while also supporting Malta's adaptation to the changing climate and ensuring the country’s resilience in the face of evolving challenges.