Risk of price bubble in ESG markets growing, BIS warns

The Bank of International Settlements (BIS) has warned of the escalating risk of a price bubble in environmentally-friendly-focused asset markets.

According to Reuters, some estimates have indicated that ESG-focused assets have soared to a value of $35trn and now account for over a third of all assets professionally managed by banks and investment funds.

In the areas of exchange-traded funds, mutual funds with ESG or socially responsible investment mandates – the growth comes to around $2trn.

A recent quarterly report by BIS stated that ‘there are signs that ESG assets’ valuations may be stretched’. BIS regularly holds meetings for the world’s central banks.

Claudio Borio – head of BIS’ monetary and economic department – described the risk as the ‘green bubble’ and underlined how the surge in ETFs and mutual funds was comparable to the parts of the mortgage-backed security market prior to the 2008 global financial crisis.

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

Borio noted that authorities must be aware of the risk such huge shifts in investor demands can have and also warned of ‘definitional risk’ and ‘greenwashing’ which could also cause values to plunge.

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