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Central bank group BIS warns of green asset bubble risk By Reuters


© Reuters. FILE PHOTO – The Tower of the Bank for International Settlements headquarters (BIS), can be seen in Basel on January 30, 2020. REUTERS/Arnd Wiegmann

By Marc Jones

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

Environmental, Social and Governance investments have seen a surge in popularity as the world struggles to address other pressing issues like racial and socio-economic inequality.

ESG-focused assets are now worth more than one third of assets professionally managed and owned by investment banks.

ETFs (exchange-traded funds) and mutual funds mandated with ESG, or socially responsible investments (SRI) can be considered a more narrow definition that could lead to a tenfold increase to around $2 trillion. The evidence of this is evident in green bonds, clean energy, electric car stocks and other assets that have experienced rapid growth in recent years.

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

Claudio Borio (head of its monetary-economic department) referred it to as the “green balloon” risk. He highlighted how ETFs’ and mutual fund surges were similar to those in mortgage-backed securities markets during the crisis.

Borio stated that you could get too many good things too fast. We all know the value of valuations is quite rich.

Although prices have slowed somewhat in recent years, markets are full of examples. Electric car doyen Tesla (NASDAQ:) for example raced up 750% in last year’s frenzy and is up 16,000% over the last decade.

Borio stated that authorities must be alert to the risks associated with huge changes in investor demand. He also made comparisons to both the 2000s internet stock boom and 1800s railroad boom.

The fact that the majority of exposure is to equity market, which has less systemic significance, should ease regulators’ fears.

ESG linked bonds currently account for only 1% of U.S. bank bond portfolios.

Borio warned about “definitional and greenwashing”, which could lead to exaggerated claims of environmental benefits. Values could plummet if these exaggerations become public.

BIS also reported on current global inflation. This is due to rising energy costs and labor costs, as world economies recover from COVID-19-imposed shutdowns.

Borio indicated that although the BIS believed the increase in inflation was temporary, it was still not clear-cut as originally thought.

Borio stated that while it may be possible, given the supply-side constraints and other pressures we are seeing, the outlook hasn’t fundamentally changed.

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