BIS warns over possible ESG price bubble

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

“There are signs that ESG assets’ valuations may be stretched,” the BIS said as part of its latest quarterly report.

Claudio Borio, head of its monetary and economic department, referred to it as the “green bubble” risk, and warned it was comparable to parts of the mortgage backed security market in the run-up to the global financial crisis.

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

Borio warned of so-called “greenwashing”, where the environmental benefits of certain assets were potentially being over-exaggerated. If those exaggerations are exposed, values could then plunge.

Despite such warnings, the risks of systemic damage is limited given that current holdings of ESG linked bonds are only estimated to account for about 1% of total bond portfolios for both US insurance companies and European banks.

The BIS’ report also focused on the current surge in global inflation, which is being fuelled by rising energy and labour costs as the world’s economies reopen after COVID-19 enforced shut downs.

Borio said the BIS’ view remained that the rise in inflation would be temporary although he acknowledged it wasn’t as clear cut as initially expected.

“It may indeed be possible as we see in terms of 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,” he said.

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