Central bank group BIS warns of green asset bubble risk

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The headquarters tower of the Bank for International Settlements (BIS) is seen in Basel, Switzerland, January 30, 2020. REUTERS / Arnd Wiegmann

LONDON, Sept. 20 (Reuters) – The central bank of the world’s central banks, the Bank for International Settlements, has warned of the growing risk of a price bubble in markets for environmentally friendly assets.

The growing urgency to limit global warming and tackle other issues such as racial and social inequalities has seen environmental, social and governance (ESG) investments explode in popularity in recent years.

Some estimates indicate that ESG-focused assets have reached a value of $ 35 trillion and now represent more than a third of all assets professionally managed by banks and investment funds.

A narrower definition including only exchange-traded funds (ETFs) and mutual funds with ESG or socially responsible investment (SRI) mandates indicates even faster and ten-fold growth, reaching around $ 2 trillion . Evidenced by assets such as clean energy and electric car stocks and green bonds, which have skyrocketed in recent years.

“There are signs that ESG asset valuations could be stretched,” said the BIS, which holds regular meetings for central banks around the world, as part of its latest quarterly report.

Claudio Borio, head of his monetary and economic department, called it a risk of a “green bubble”, pointing out how the surge in ETFs and mutual funds was comparable to that of parts of the securities market. mortgage-backed as the global financial crisis approaches.

“You could have too much, too quickly of a good thing,” Borio said. “We know the valuations are pretty rich.”

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Borio said authorities need to be aware of the risk that such huge changes in investor demand can have, also making comparisons to the internet stock boom of the early 2000s and the railroad boom in the late 2000s. 1800.

For now, regulators’ concerns should be assuaged by the fact that most of the exposure is to equity markets which tend to have less systemic relevance.

It is estimated that current holdings of ESG bonds represent only around 1% of the total bond portfolios of US insurance companies and European banks.

Borio also warned of “definitive risk” and what is known as “greenwashing”, where the environmental benefits of certain assets are potentially overexaggerated. If these exaggerations are exposed, then values ​​could plunge.

The BIS report also focused on the current surge in global inflation, which is fueled by rising energy and labor costs as global economies reopen after forced shutdowns. of COVID-19.

Borio said the BIS view remained that the rise in inflation would be temporary, although he acknowledged that it was not as clear as initially expected.

“This may indeed be possible, as we see in terms of the constraints on the supply side and some of the pressures, could last a bit longer than we originally anticipated, but the point of view does has not fundamentally changed, ”Borio said.

Green asset markets have similarities to other financial bubbles

Reporting by Marc Jones Editing by Bernadette Baum

Our Standards: Thomson Reuters Trust Principles.

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