ZURICH – The Bank for International Settlements, considered the central bank of central banks, warned Monday of a potential bubble forming around the boom for so-called green investments.
In its quarterly review, BIS said the financial markets have been sending “mixed signals” in recent months, reflecting “investor unease” about the economic prospects ahead.
The institution focused in on green investments, along with technology stocks, which are also in very high demand.
“Demand for investment products classified as delivering environmental, social and governance (ESG) benefits is booming,” BIS said.
It said the growth of the overall ESG market was riding mostly on investors’ focus on environmental considerations, particularly in fixed income markets.
However, “given the very fast growth of the new asset class, there are questions about the possibility that a bubble might develop unless market transparency can be ensured,” the BIS said.
“Could a fundamentally welcome development –helping to finance the transition to a low-carbon world generate significant financial imbalances?” BIS asked.
Historically, the investments that accompany major economic and social changes tend to undergo large price corrections after an initial investment boom, BIS recalled.
It cited the examples of the surge in investments in railway stocks in the mid-1800s and internet stocks during the “dot-com” boom at the turn of the 2000s.
There are signs that ESG assets’ valuations may be stretched, BIS said.
However, quantifying the expansion of these assets remains a complex task given the vagueness of the criteria used to define them.
Some estimates indicate that ESG assets rose by nearly one third between 2016 and 2020 to $35 trillion, or no less than 36 percent of total professionally managed assets.