A new study by researchers at the Bank for International Settlements (BIS) has shown there would be few disadvantages for central banks to use "green" bonds as foreign exchange reserve assets. Central banks typically build up billions worth of assets that can be easily sold for dollars or another major global currency in times of stress.
They mostly tend to be US Treasuries, gold or other highly liquid government bonds, but with the growing threat of climate change, policymakers are looking at whether central banks could help. Back in March, Norway's sovereign wealth fund, the world's largest and which manages $1 trillion of the country's assets, said it was dumping investments in oil and gas exploration firms.
The BIS study looked at buying "green" bonds - bonds that fund projects or infrastructure that reduce carbon emissions or other environmentally-benefical work - for reserves purposes. While the relatively small size of the green bond market meant their accessibility and potentially patchy liquidity currently posed "some constraints" there were few real disadvantages compared other types of bonds.
They found that about 65% of the green bonds issued so far this year were "investment grade" quality (above BBB+ credit rating) that central bank reserve rules often require. Performance had also compared reasonably well with their conventional peers. A US dollar investor tracking the green index would have enjoyed a spread 4 basis points above that of the conventional benchmark (positive "portfolio greenium"), while the euro-based investor would have earned 12 basis points less than the comparator market (negative portfolio greenium).
Overall "we find that sustainability objectives can be integrated into (central bank) reserve management frameworks without forgoing safety and return," the BIS study's authors said. Central banks with abundant FX reserves, which are more likely to hold less traditional reserve assets anyway, may also look at changing what they put in their corporate bond and equity portfolios too. "After all, there is more than one way to go green," the BIS study said.
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