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Bank for International Settlements to launch green bond funds for central banks

Bank for International Settlements to launch green bond funds for central banks

Dollar and euro-denominated funds are response to demand from central banks

Peter Zöllner of the BIS

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The asset management arm of the Bank for International Settlements, the Switzerland-based central banking organisation, is set to launch its first green bond funds for its central bank customer base in a matter of weeks.

Part of a wider green bond initiative, the move is in response to “growing demand for climate-friendly investments” among central banks, according to the BIS’s annual report released over the weekend.

It’s not new for central banks to buy green bonds – in November last year the European Central Bank revealed that EU central banks owned 20% of all non-bank corporate green bonds that had come out of Europe.

“We are confident that by bundling the investment power of central banks, we can influence the behaviour of market participants”

However, labelling the allocations as green by buying through dedicated funds is something more novel.

The BIS provides banking services, including asset management, to around 150 central banks, including its 60 members, as well as managing SDR20bn (€24bn) of its own capital.

SDR stands for Special Drawing Rights, the international reserve asset. As of end of March 2019, the BIS’s total assets stood at SDR291.1bn.

Subscription for the two green bond funds – one denominated in US dollars and the other in euros – is expected to open in the summer.

The open-ended fund structures will be based on Swiss law and invest in bonds with a minimum rating of A-.

The funds will be run internally and built using the BIS Investment Pool (BISIP) structure commonly used by the bank for its fixed income investment products.

The launch of the new green products is part of the bank’s green bond initiative, launched last year “to help central banks invest in green assets”.

According to the new BIS annual report, as well as making “sizeable climate-friendly investments”, the initiative will aim to safeguard against greenwashing by establishing minimum eligibility standards for “green-ness”.

It claims it will also support standardisation, certification and adoption of best practice principles.

Peter Zöllner, Head of the BIS Banking Department, said the bank would have “very strict rules” for eligibility, drawing on the Green Bond Principles and the Climate Bonds Standard as well as insisting on external certification.

Zöllner, a former Executive Director at the Austrian Central Bank, said: “We are very confident that by bundling the investment power of central banks, we can influence the behaviour of market participants and have some impact on how standards develop.”

“The BIS has a range of products based on this BISIP structure so we have a lot of experience in it. This is an issue of efficiency gains of bundling efforts and making sure that there is a uniform standard that central banks can rely on.”

The initiative is supported by an advisory committee of 26 central banks, including representation from Asia/Pacific, Africa, the Americas and Europe.

Central bank ownership of green bonds has raised concern among some investors who consider the banks to be “crowding out” other buyers. Others, meanwhile, say the purchases could be spurring corporate issuance.

It is just the latest news signalling heightened interest in green finance among central banks.

Earlier this month, the Bank of England released specifications for integrating climate risk scenarios for its biennial insurance industry stress tests and confirmed it would conduct a climate stress test for financial institutions in 2021.

And – in remarks that haven’t received wide coverage – it added it expects all listed companies and large asset owners to be disclosing in line with the TCFD, the Task Force for Climate-related Financial Disclosures, by 2022.

The BIS hosts the Basel Committee on Banking Supervision, the primary global standard-setter for the prudential regulation of banks, which signed up to the Network for Greening the Financial System (NGFS) as an observer earlier this month.

The BIS itself is represented on the NGFS Steering Committee, and has a cross-departmental team feeding into to the NGFS’s global working groups looking at climate-related risks (CRRs) and their implications for financial stability.

See separate story: The taxonomy is a good starting point for central banks to step up as asset owners.

Related content: Responsible Investor webinar: Central bank action on climate risk & the energy transition- G20 investor update

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