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Cambridge Institute for Sustainability Leadership (CISL)

November 2019: Central banks are expanding the triad of safety, liquidity, and return on investments to include ESG indices. This trend is prompting foreign exchange investments into green bonds and increases returns on investments that are on par with benchmarks across conventional investment sectors.

Information

A new report suggests that central banks are looking to expand the triad of liquidity, safety, and return on investment to include environmental sustainability objectives into their reserve management frameworks. This trend is prompting an increased allocation of foreign exchange reserves to green bonds. The report notes that the so called ‘greenium’ – premiums investors pay to buy debts that companies sell to finance new or existing green projects – is lower than expected and that the dollar-denominated debt offers a higher return than conventional bonds. In addition, an increasing number of green bonds is securing high investment-grade ratings which attracts conservative investors such as central banks. This trend is supported by changing investment preferences of younger generations, public policy shifts, and technological advancements. The report contributes to a growing body of evidence that integration of ESG indices does not imply lower investments performance but is on par with benchmark indices across traditional investment sectors.  

Implications & Opportunities

Despite positive trends, the report notes that further growth may be challenged by current environment of trade wars and consequent volatility in the market. The green bonds market is reliant on central banks to have ‘excess reserves’ which can be invested into less liquid assets with higher returns. It underscores the importance of central banks embracing sustainable finance goals and mainstreaming investments into green bonds; thus, incentivising future growth and an increased number of assets in secondary markets. Attractive investment performance of green bonds could contribute to climate change mitigation, guide large infrastructure investments, and shape sustainable transport management.

Limitations

The findings benchmark green bonds with returns on conventional bonds and notes that all findings should only be seen as trend guidelines. Green bonds are volatile in nature and vary considerably over time due to differences in issuer composition across benchmarks.


Sources

Fender, I., Sahakyan, V., McMorrow, M., Zulaica, O. (2019). Green Bonds: The Reserve Management Perspective. Bank for International Settlements Quarterly, September.

Financial Times. (2019). Asia has a crucial role in the development of sustainable finance. Retrieved from https://www.ft.com/content/40943fcb-2e3d-374f-8d39-bfab486433a3