BIS: Upswing in ESG Investments May Be Creating a "Green Bubble"By Cinthya Alaniz Salazar | Mon, 09/20/2021 - 12:20
Central bank umbrella group Bank for International Settlements (BIS) warns that the sudden burgeon of ESG environmentally friendly-focused assets may be creating a green market bubble.
The rise of Environmental, Social and Governance (ESG) investment came from corporate actor’s conscientious role in addressing acute social issues namely climate change, considered the most time sensitive predicament. This shift in corporate practice has led to an explosion in ESG-focused assets, which are presently valued at US$35 trillion, accounting for more than a third of all assets managed by professional banks and investment funds.
The observed phenomenon is most pronounced in only exchange -traded funds (ETFs) and mutual funds with ESG or socially responsible investment (SRI), most commonly associated with clean energy electric car stocks and green bonds, have grown ten-fold in recent years representing approximately US$2 trillion investment. From this the central bank inferred that “[t]here [were] signs that ESG assets’ valuations may be stretched” according to their quarterly report.
Claudio Borio, head of its monetary and economic department, found the “green bubble” risk comparable to aspects of the internet stock boom of the early 2000s and the mortgage-backed security market before the 2008 global financial crisis saying: “You could have too much, too quickly of a good thing. We know valuations are rather rich”.
Moreover, the central bank group also cited “greenwashing”, or the over-exaggeration of environmental benefits of certain assets and the downplay of potential liabilities, which if exposed could lead to a plunge in values. Furthermore, limited disclosure rules and the absence of standardization poses a risk to ESG investors, representing an important inflection point for the sector.
Nonetheless, the BIS determined that an implosion of the green bubble will not have the same devastating potential to that of the 2008 mortgage market, calling fallacious ESG investments “of indirect concern from a financial stability perspective.” Presently, the phenomenon is most relevant to equity markets. This is due in part that ESG bonds only account for 1 percent of total bond portfolios for US insurance companies and European banks occurring thereby posing a lesser risk to the overall financial system.