Green assets may be in a bubble as ESG push drives up prices of eco-friendly investments, BIS warns

• The Bank for International Settlements said on Monday that the explosion in ESG assets may be creating a new bubble.
• It flagged several widely discussed issues in ESG investing, such as "greenwashing."
• But the BIS noted that the potential for contagion between ESG and the real economy is far more limited than the 2008 mortgage market.

A "green bubble" may be forming as an institutional push for ESG-friendly assets has launched eco-friendly investments to new heights, the Bank for International Settlements warned on Monday.

The BIS, often called the central bank of central banks, said the explosion in assets embracing environmental, social, and governance criteria has ballooned valuations for ESG-linked funds and stocks like Tesla, invoking a comparison to skyhigh mortgage prices prior to the 2008 financial crisis.

"You could have too much, too quickly of a good thing," BIS monetary and economic head Claudio Borio told Reuters. "We know valuations are rather rich."

In making the comparison to 2008, the BIS noted in its quarterly report that the pre-crisis growth of private-label mortgage-backed securities mirrored recent growth in ESG mutual funds and ETFs.

It also flagged several widely discussed issues in ESG investing, such as "greenwashing," where ESG fund providers exaggerate socially beneficial upsides or obscure downsides. Limited disclosure rules and a lack of standardization could also pose risks to ESG investors, the BIS said.

But the BIS noted that the potential for contagion between ESG and the real economy is far more limited than the 2008 mortgage market, calling faulty ESG investments "of indirect concern from a financial stability perspective."

In part, this is because the ESG phenomenon is mostly occurring within stocks, which tend to pose fewer systemic risks than debt markets. For comparison, ESG bond holdings make up around 1% of bond portfolios for US insurers and European banks, according to Reuters.