BIS fears green ESG asset bubble could burst

THE Bank for International Settlements (BIS) is nervous about a “bubble” in funds that specialise in environment social and governance (ESG) stocks and bonds.

It also warned that emerging market economies are vulnerable to bottleneck inflation and the slowdown in China.

“Demand for investment products classified as delivering ESG benefits is booming,” cautions the Basel-based BIS which is the global central banks’ central bank.

Governments around the world and individuals have encouraged market participants to support the transition to a low-carbon economy. But the BIS cautions that “a bubble might develop” with so much money placed in ESG securities

It is difficult to pin down precise amounts that have been placed in ESG assets.


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One estimate – which covers a broad range of investments integrating ESG criteria with “thematic”, “impact” and “community” investing – places ESG assets at around $35 trillion. This would be a whopping 36 per cent of total professionally managed assets.

Another set of estimates is based on a narrower definition. It includes only mutual funds and exchange-traded funds (ETFs) that report they have ESG or socially responsible investment (SRI) mandates.

The assets managed by these funds have soared more than tenfold over the past five years to around $2.4 trillion.

ESG/SRI equity funds account for about 3 per cent of total mutual fund and ETF assets under management, and ESG/SRI bond funds for about 1 per cent.

The current holdings of bonds with proceeds earmarked for environmental or social projects – bonds labelled as green, social or sustainable – represent only about 1 per cent of total bond portfolios for both US insurance companies and European banks, the BIS estimates.

US pension funds’ green bond holdings, however, have grown rapidly since 2017 and comprise about 4 per cent of their current corporate credit exposure.

The BIS warns that the valuations of ESG funds are rich

As an example, the price earnings ratio of S&P’s global clean energy index touched almost 78 times earnings early this year before tumbling to 42 times.

This is well in excess of the S&P 500 index, which is also at historically high levels.

The BIS said that “assets related to fundamental economic and social changes tend to undergo large price corrections after an initial investment boom”.

Examples include railroad stocks in the 19th century, Internet stocks during the dotcom bubble and mortgage-backed securities ahead of the 2008-09 global financial crisis (GFC).

“It is noteworthy that the pre-GFC growth and size of the private-label mortgage-backed securities market are comparable with ESG mutual funds and ETFs,” the report said.

“If the ESG market continues to grow at the current pace, it will be important not only to assess the benefits of financing the transition to a low-carbon world, but also to identify and manage the financial risks that might arise from a shift in investors’ portfolios.”

The BIS is also concerned about emerging market “headwinds”

Besides the ongoing coronavirus pandemic and the spread of the highly infectious Omicron and Delta variants, there are a host of country-specific developments. They, include inflationary pressures, especially in Latin America, and a weaker growth outlook in China. Throughout 2021, the flows to these economies generally improved when US long-term rates declined.

But this trend “reversed sharply” after the US Federal Reserve indicated that they would begin reversing monetary ease and begin to raise interest rates. Emerging market economies other than China experienced outflows.

The BIS is also focused on the surge in global inflation. It is being fuelled by rising energy and labour costs as countries gradually reopen their economies.

Claudio Borio, the head of BIS’ monetary and economic department, said that the rise in inflation would be temporary. But he acknowledged that the prediction “was not clear cut”.

“Supply side constraints and some of the pressures, could be somewhat longer lasting than we had originally anticipated, but the view has not fundamentally changed,” said Mr Borio.

© copyright Neil Behrmann.(  This article was first published in The Business Times Singapore . For other Asian and global articles try

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