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Markets Turn Green as Activists Pressure Central Banks

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Can quantitative easing save the planet?

A form of the risky money-printing measure that central banks around the world used to end the last recession is gaining traction as a way of getting markets to do the work of environmentalists. It’s one of a number of ideas being mulled by economists and academics keen to see a“greening” of the global financial system.

Green Quantitative Easing

So-called green quantitative easing (GQE) — in which money would be printed to fund projects that reduce greenhouse gases — is yet to get off the drawing board. But many other eco-friendly financial schemes are already working well. Issuance of green bonds to fund sustainable projects is surging, banks are divesting from fossil fuels and hundreds of climate change-linked exchange traded funds (ETFs) are making tidy returns for investors.

The long-term aim of activists, however, is to convince central banks to put sustainability initiatives at the centre of their policies.

“I think there will actually be a time when central banks take environmental concerns into account, because their conventional model no longer works and their traditional tools are exhausted,” said Hazel Henderson, president of Ethical Markets, a Florida-based pressure group that’s campaigning for a retooling of the world financial system in a way that fosters sustainability.

Bank of England Failing

The organisation notes that some of its aims are already on track. In its latest Green Transition Scoreboard report, it noted that $9.4 trillion was invested in companies and projects it deemed as green. According to University College London researchers, however, such investments account for a tiny 0.2% of global financial flows.

The campaign to get central banks on board stepped up a gear this month when think tank Positive Money published a study into what to called the damaging effects of the Bank of England’s monetary policy.

In Green Bank of England: Central Banking for a Low-Carbon Economy, its author Rob Macquarie called on Bank Governor Mark Carney to begin transforming the venerable institution into a promoter of green initiatives.  

“The Bank of England must play a central role in preventing climate catastrophe and lead the transition to a low-carbon economy,” Macquarie said. “Right now it isn’t doing enough.”

Green Bonds Surge

Macquarie argued that the Bank’s quantitative easing policy had unintentionally promoted investment in high-carbon industries. The policy that had resulted in record-low interest rates and printed £375 billion to pull the economy from the recession needed to be reversed, he said. He suggested the Bank draw up a raft of regulations to green the UK market, encourage the issuance of bonds linked to sustainable projects and instigate a programme of GQE.

But the market already be beating the environmentalists at their own game. As Ethical Markets scorecard shows, investors are already putting their money where campaigners’ mouths are.

Green bonds are big business. Yields have plummeted in the past decade as their wider acceptance has boosted issuance quality and reduced their riskiness. Funds that buy them are making decent profits, too. Generation, co-founded by former US vice president and environmentalist Al Gore, has more than $20 billion dollars under management and pulls in returns in the low teens, according to the Financial Times.

“Green bonds are almost over-subscribed now with every issue, but they still represent a small” sector of the market, Henderson said.

Changing Investor Mentality

As well, commercial banks are some way ahead of the central banks. RBS recently became the latest financial giant to shun lending to, or investment in, companies or projects linked to fossil fuels. HSBC and Deutsche Bank are among banks that also have similar policies in place.

It all comes down to what International Finance Corporation (IFC) CEO Philippe Le Houérou called an ongoing change in investor mentality — in short, they are becoming more green-minded.

“This is not a peripheral exercise,” Brian Deese, global head of sustainable investing at BlackRock, the world’s biggest money manager, reportedly told a gathering of investors at the UN in New York. “If you’re not a climate-aware investor, you’re fundamentally not doing your job.”

Note: The opinions expressed in this article are the author's own and do not necessarily reflect the view of Alvexo on the matter.