Green bonds could prove to be the next bubble to burst, a global banking watchdog has warned.
The Bank for International Settlements said that the growth in ESG funds is comparable with the dotcom and sub-prime mortgage bubbles that burst spectacularly earlier this century.
Investor demand for environmental, social and governance bonds has rocketed in recent years as policymakers support the shift to a low carbon economy. Some estimates suggest that ESG assets rose by nearly a third between 2016 and 2020 to $35tn, the BIS said.
The BIS added that “ESG assets’ valuations may be stretched” at the moment, and that the “greenium could signal market overheating”.
“Historical lessons could be relevant,” it added. “Assets related to fundamental economic and social changes tend to undergo large price corrections after an initial investment boom. Railroad stocks in the mid-1800s, internet stocks during the dotcom bubble and mortgage-backed securities in the financial crisis are cases in point.”
The Treasury wants to issue £15bn of green bonds before April.
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