BIS国际清算银行-Reserve-management-and-sustainability_-the-case-for-green-bonds_23页_358kb

Summary of BIS Working Paper No 849: "Reserve Management and Sustainability: The Case for Green Bonds?"

Core Content

This BIS Working Paper explores the potential integration of environmental sustainability into central banks' foreign exchange (FX) reserve management frameworks. Traditionally, central banks have balanced three key objectives: liquidity, safety, and return. The paper suggests that sustainability could be a fourth objective, expanding the triad into a tetrad. It examines whether green bonds can be included in reserve portfolios without compromising the traditional goals of liquidity, safety, and return.

Main Points

1. Central Banks and Sustainability

• Central banks are increasingly involved in promoting a sustainable global economy.
• The Network for Greening the Financial System (NGFS) is a key initiative involving around 40 central banks, financial regulators, and institutions, aiming to address climate-related risks.
• Sustainability considerations can be integrated into reserve management in explicit or implicit ways, depending on the central bank's mandate and governance structure.
• Some central banks already include sustainability in their mandates, while others are exploring its potential.

2. Reserve Management Objectives

• The traditional triad of objectives is liquidity, safety, and return.
• The paper proposes the addition of sustainability as a fourth objective.
• A 7x3 matrix (Graph 1) illustrates the trade-offs between the seven economic uses of reserves and the three objectives, showing that different uses lead to different portfolio allocations.

3. Sustainability Integration

• Explicit integration would require changes to central bank statutes or governance documents to explicitly include sustainability as a policy objective.
• Implicit integration involves incorporating sustainability into the pursuit of traditional objectives, such as enhancing investor confidence or managing reputational risk.
• A majority (55%) of surveyed institutions believe that integrating sustainability may weaken liquidity, while 72% think it may have a neutral to strengthening impact on safety.

4. Tools for Sustainability Integration

• Central banks use various tools to integrate sustainability, including:
  • Green bond investments (most preferred, as per Graph 6).
  • ESG criteria in investment analysis.
  • Climate risk assessment in investment beliefs.
  • Environmental risk management in enterprise risk models.
• Examples of central banks using these tools include the Banque de France and De Nederlandsche Bank.

5. Green Bonds: Liquidity, Safety, and Return

• Green bonds are fixed-income instruments used to fund green projects, such as those related to climate change, biodiversity, and pollution.
• The green bond market has grown significantly, with issuance rising from less than $50 billion in 2014 to $230 billion in 2018.
• Green bonds are typically asset-backed or asset-linked, and issuers must declare the eligible green projects at issuance.
• They represent a major part of the socially responsible investment (SRI) universe, which includes bonds and equities from ESG-compliant issuers.

6. Liquidity of Green Bonds

• Liquidity is defined as the ability to trade an instrument with minimal price impact.
• The green bond market is still relatively small, with US dollar and euro-denominated green bonds accounting for only 7.4% of global FX reserves.
• The bid-ask spreads for green bonds are slightly wider than for conventional bonds, especially in medium to long-term maturities.
• Despite these challenges, strong demand may support greater liquidity in the future.

7. Safety of Green Bonds

• Safety refers to the ability to preserve portfolio value, typically measured by credit ratings.
• Green and conventional bond markets have shown convergence in credit ratings, supporting their eligibility for reserve portfolios.
• Government green bonds tend to have lower credit quality due to the limited number of issuers.
• Default risk is similar between green and conventional bonds from the same issuer, as both are typically backed by the issuer's full balance sheet.

8. Return on Green Bonds

• Green bonds can offer diversification benefits and improve risk-adjusted returns when combined with conventional bonds.
• Portfolio construction suggests that including green bonds can enhance returns without significantly compromising safety or liquidity, depending on the central bank's approach.
• Two hierarchical approaches to portfolio construction are discussed:
  • Model 1: Prioritises liquidity and safety first, then maximises return.
  • Model 2: Trades off liquidity, safety, and return simultaneously, focusing on risk-adjusted returns.

Key Information

• JEL classification: E58, F31, G11, G17.
• Survey results: Based on a BIS survey of 102 institutions, the paper provides insights into how central banks perceive the role of sustainability in their reserve management.
• Green bond market: Has grown rapidly, with a significant increase in issuance and a broader range of issuers and currencies.
• Challenges: Green bonds currently face liquidity and accessibility constraints, limiting their use in reserve portfolios.
• Opportunities: Green bonds can offer diversification benefits, potentially improving risk-adjusted returns.
• Future outlook: With increasing sustainability interest, central banks may need to reassess their investment guidelines and allocate a portion of reserves to green bonds to support the transition to a sustainable economy.

Conclusion

This paper concludes that green bonds can be a viable tool for central banks to integrate sustainability into their reserve management frameworks. While there are liquidity and accessibility challenges, the diversification benefits and potential for improved risk-adjusted returns make them an attractive option. The explicit or implicit integration of sustainability depends on the central bank's mandate and governance structure, with a growing number of institutions considering sustainability as a fourth objective. The paper calls for further research and standardisation in the green bond market to support its role in reserve management.