ECB to Invest in New BIS Green Bond Fund

    Stockholm (NordSIP) – The European Central Bank (ECB) announced it will use its own funds portfolio to invest in the euro-denominated green bond investment fund for central banks introduced by the Bank for International Settlements (BIS) on January 25th. The EUR BISIP G2 fund is the second of its kind, following the September 2019 launch of the BIS green bond fund denominated in US dollars. This investment occurs at the same time as the ECB launched an internal climate change centre to help coordinate its response to the climate crisis.

    The BISIP Funds

    Together, the two BIS green bond funds will manage a modest US$2 billion in green bonds for central banks. According to the BIS, the funds have been developed with the support of an advisory committee drawn from a global group of central banks. They are structured according to Swiss law and belong to the BIS Investment Pool (BISIP) family, a format commonly used by BIS Asset Management for its fixed-income investment products.

    The funds are managed in-house by BIS Asset Management. Eligible bonds 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. The BIS produces a yearly impact report for investors based on the information provided by the issuers of the bonds in which the funds invest.

    “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,” Peter Zöllner, Head of the BIS Banking Department, said. “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.”

    ECB Going Green

    The ECB’s willingness to support the green bond market is consistent with the general appetite for green investments in Europe and a reflection of the ECB President’s own priorities. “In terms of investment, the ECB cannot exclusively invest its €2.6 trillion portfolio into green bonds because there is not enough of a market. But if it signals that it will be looking at that, it is also something that the market registers in terms of where it is going to direct its funding,” Christine Lagarde commented on September 2019, at her European Parliament confirmation hearing.

    According to the ECB, investing in the BISIP funds allows it to contribute “to global efforts to promote environmental objectives – including the EU climate goals – and to combat climate change. The BIS green bond fund invests in renewable energy production, energy efficiency, and other environmentally friendly projects.”

    This investment complements direct purchases of green bonds in secondary markets. It is consistent with the ECB’s sustainable and responsible investment (SRI) strategy to increase the share of green securities in its own portfolio. As of the announcement, the ECB held green bonds worth €20.8 billion, equivalent to 3.5% of its own funds portfolio, with plans for further growth.

    The ECB is also taking steps to increase sustainable and responsible investments in its staff pension fund. Lagarde hinted at this in the 2019 hearing Lagarde, saying that “there is a pension fund that is actually managed by the ECB which can certainly take decisions with respect to where it invests.”  Subsequently, in 2020, all conventional equity benchmark indices tracked by the staff pension fund were replaced with low-carbon equivalents, which has significantly reduced the carbon footprint of the equity funds.

    Going forward, the ECB notes it is exploring a possible expansion of its use of low-carbon benchmark indices to fixed-income asset classes within its pension fund.

    Image © Shutterstock

    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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