Climate change: BIS to create Asia-focused green bond fund for central banks

·4 min read

The Bank of International Settlements (BIS) plans to launch a dollar-denominated green bond fund focusing on investments in Asia in the first half of next year.

It will be the third green bond fund created by the Basel, Switzerland-based organisation in the past two years, but focusing on a region where it can have the most effect, according to Siddarth Tiwari, BIS’s chief representative for Asia and the Pacific.

“It is a tangible example of the central banking community stepping up and doing something that is consistent with their mandate in terms of financial stability and price stability, and being supportive of the general direction that the policymakers are taking,” Tiwari said.

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The fund will allow central banks within Asia – and outside the region – to invest their reserves in environmentally sustainable projects in the region through green bonds offered by sovereigns, supranational institutions and commercial banks meeting strict international standards. It will be the first of the three funds to include investments in green bonds offered by commercial banks, reflecting the role those banks play in Asia.

BIS debuted its first dollar-denominated green bond in September 2019 and a second euro-denominated fund in January of this year. Those two funds manage about US$2 billion in green bonds for central banks.

Founded in 1930, BIS is owned by 63 central banks and provides financial services to central banks, monetary authorities and international organisations worldwide.

The newest fund will work closely with the Asian Development Bank and other financial institutions focused on development, the BIS said.

“This initiative to connect the central banking community with the development financing community represents a concrete contribution in our collective efforts to combat climate change in the Asia-Pacific, a region that not only has the largest need for green infrastructure investments, but also is among the most vulnerable if actions to combat climate change are not taken urgently,” Agustin Carstens, the BIS’s general manager, said.

The announcement comes just weeks after BIS sounded the alarm in its quarterly review that the fast growth of financing to deliver on environmental, social and governance (ESG) goals could lead to a bubble “unless market transparency can be ensured”.

Chinese President Xi Jinping delivers a keynote speech at the 2nd United Nations Global Sustainable Transport Conference in October. China pledged to reach carbon neutrality by 2060. Photo: Xinhua
Chinese President Xi Jinping delivers a keynote speech at the 2nd United Nations Global Sustainable Transport Conference in October. China pledged to reach carbon neutrality by 2060. Photo: Xinhua

“There are signs that ESG assets’ valuations may be stretched, although the available evidence stems from segments that are of indirect concern from a financial stability perspective. Even after a decline from their peak in January 2021, price-to-earnings ratios for clean energy companies are still well above those of already richly valued growth stocks,” authors Sirio Aramonte and Anna Zabai wrote in the BIS review.

“Rich valuations in credit markets would be more relevant for assessing possible risks of financial distress, given the potential for defaults. More analysis would be needed to evaluate this possibility, including by estimating the size of any ‘greenium’ or ‘socium’ – the lower premium that market participants require for bearing financial risk when their investments support environmental or social causes – as it could signal market overheating,” they added.

It also comes on the eve of the widely anticipated 2021 United Nations Climate Change Conference, known as COP26, in Glasgow, Scotland.

The latest gathering of world leaders to discuss climate change and how to address it comes just over a year after Chinese president Xi Jinping pledged for China to be carbon neutral by 2060. Other major economies in Asia have also committed to be carbon neutral by 2050 or 2060 in the past year.

Companies and governments are facing increasing pressure to take urgent steps to address climate change, with central banks from the People’s Bank of China to the US Federal Reserve seeking to develop models to stress-test major financial institutions on their exposure to risks from climate change.

“The BIS green bond fund will invest in Asia, broadly speaking,” Tiwari said. “That’s a clear recognition that climate is a global externality, that spending in one country alone is not going to tackle it. There needs to be region-wide investment across countries, including in those jurisdictions where the central bank has not contributed.”

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