Central banking body ramps up green bond investment to $2bn with ECB-backed euro fund

The Bank for International Settlements (BIS) has announced the launch of a new euro-denominated, open-ended green bond fund, which will see the Switzerland-based central banking body’s investments in green bonds grow to $2bn.

The move builds on the creation of a similar, US dollar-denominated green bond fund by BIS, which provides financial services to around 140 central banks, monetary authorities and international organisations globally. That fund was unveiled in 2019 and hit $1bn last summer. It is unclear how much of the $2bn target is attributed to each fund, but BIS said both vehicles are expected to continue to “grow considerably”.

The European Central Bank (ECB) is one of the first to invest in the new euro-denominated fund, announcing that it will invest part of its “own funds portfolio”. The central banks of Spain and Portugal announced on Twitter that they have also participated in the new fund. 

Last year, the ECB replaced its conventional equity benchmarks with low-carbon equivalents and already holds green bonds amounting to 3.5% of its own funds portfolio, which has a total market value of €20.8bn. 

Both BIS’ green bond funds are structured according to Swiss law and are managed by the body’s in-house manager BIS Asset Management.

Investments are directed towards “high-quality bonds that comply with international green standards and finance environmentally friendly projects”, such as renewable energy production and energy efficiency. 

To be eligible, bonds must have a minimum rating of A– and comply with the International Capital Market Association's Green Bond Principles and/or the Climate Bond Standard published by the Climate Bonds Initiative.

Last September, BIS published a report suggesting that there is no link between green bonds and corporate issuers reducing their carbon emissions. 

BIS is a member of the Central Banks and Supervisors Network for Greening the Financial System (NGFS), the international network of central banks, supervisors and international organisations promoting environmental responsibility in the financial sector.

“Central banks around the globe have continued to support this joint green bond fund initiative and channel funds into the green bond market through the BIS”, said Peter Zöllner, Head of the BIS Banking Department. “In line with the initiative's objectives, we are continuing our dialogue with green bond issuers and remain committed to supporting the adoption of best market practices, including improved impact reporting, to deepen the green bond market.”

The announcement of the new fund comes as the Governor of the Bank of England was told by members of a UK parliamentary committee last week that it should stop buying bonds from businesses whose activities drive global warming.

In a letter to Governor Andrew Bailey, the Chair of the House of Commons’ Environmental Audit Committee, Philip Dunne, reportedly wrote that the UK’s central bank “must begin a process of aligning its corporate bond purchasing programme with Paris Agreement goals as a matter of urgency”.