Bank for International Settlements Gets Big ECB Mandate on Green Bonds

Posted on 01/25/2021


The European Central Bank (ECB) has decided to use part of its own funds portfolio to invest in the euro-denominated green bond investment fund for central banks (EUR BISIP G2) introduced by the Bank for International Settlements (BIS). With this investment, the ECB contributes, within its mandate, 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 in the EUR BISIP G2 is part of the ECB’s sustainable and responsible investment (SRI) strategy that targets an increase in the share of green securities in its own funds portfolio. Such investment complements direct purchases of green bonds in secondary markets. The ECB already holds green bonds amounting to 3.5% of its own funds portfolio, which has a total market value of €20.8 billion. The ECB plans to increase this share over the coming years.

Central Banks and Green Bonds

The EUR BISIP G2 is part of the BIS’s green bond fund initiative, which helps central banks to incorporate environmental sustainability objectives in the management of their reserves and capital.

In September 2019, the BIS launched a U.S.-dollar-denominated green bond fund under the same initiative. This was BIS’ first green bond fund. Together, the two BIS green bond funds will manage some US$ 2 billion in green bonds for central banks with the expectation that the funds will continue to grow considerably. The two funds 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. They 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. Furthermore, the BIS produces a dedicated yearly impact report for investors based on the information provided by the issuers of the bonds in which the funds invest. The BIS offers financial services to some 140 central banks, monetary authorities and international organizations worldwide, and has long-standing experience in managing fixed income portfolios.

Benchmarks

The ECB is also taking steps to increase sustainable and responsible investments in its staff pension fund. 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. The ECB is exploring a possible expansion of use of low-carbon benchmark indices to fixed-income asset classes within its pension fund.

Climate Change Centre

On another note the ECB formed a new unit called the Climate Change Centre. The unit will seek to bring together the work on climate issues in different parts of the bank. This decision reflects the growing importance of climate change for the economy and the ECB’s policy, as well as the need for a more structured approach to strategic planning and coordination. The new unit, which will consist of about ten staff working with existing teams across the bank, will report to the ECB’s President, Christine Lagarde, who oversees the ECB’s work on climate change and sustainable finance. The new structure will be reviewed after three years, as the aim is to ultimately incorporate climate considerations into the routine business of the ECB.

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