More rigour in rating ESG products will aid investment

Significance Ratings providers have been tightening their methodologies and scoring of ESG funds but there is no universal methodology for categorising firms or funds as sustainable, or for monitoring their sustainability. Impacts Investors will run the risk of investing in funds that are rated ‘sustainable’ but actually invest in firms with non-sustainable practises. ESG rating is likely to become part of the annual audit process in many jurisdictions but differences in methodology will persist. Questions of impartiality will persist as the accountants and rating agencies tend to be paid by the institutions they are assessing. Green bond issuance will surge; the Bank for International Settlements runs two green bond funds and will help to set industry standards.

Climate Change in the Capital Markets: A Study of Actively Managed Green Bond Funds

In this study, we carried out a performance analysis of green bond portfolios available from public databases for the period between 2017 and 2020. The aim of our research was to obtain empirical proof for the existence of the green premium, which was confirmed by risk-adjusted indicators, i.e. the Sharpe ratio, the M2 ratio and the Sortino ratio. The green premium is the return differential that can be measured between green and conventional financial instruments. According to the literature, investors are willing to forego 1 to 9 basis points of their returns in the interests of financing climate targets, to cover the issuer’s extra costs incurred from green bond ratings and reporting obligations. Our results confirmed that the green bond portfolio underperforms benchmark indices by an average green premium of 2 basis points. We only found a single green bond fund that did not involve a green premium and was capable of achieving a risk-adjusted excess return. Nevertheless, it is noted that all of the indicators used showed that the average performance of green bonds improved steadily each year in the period under review.

The renminbi will gradually check dollar dominance

Significance The share of Chinese central government bonds held by foreigners rose to 8% at end-October, from 1.2% at end-2019 as Chinese stock and bond funds were included in global indexes. The comments of Yi and others give salience to discussion of the renminbi challenging the dollar's pre-eminence as a global currency and reflect Beijing’s concern about US attempts to use the dollar’s dominance to contain its global influence. Impacts US use of financial and economic sanctions will encourage cross-border payments systems that can isolate transactions from the dollar. China will cautiously liberalise its capital account, raise renminbi exchange-rate flexibility and improve liquidity in its bond market. The EU, Switzerland and Japan do not want 'safe-haven' inflows because of the risk of currency appreciation hurting their real economies. At times of financial market stress (eg, COVID-19) the onus is on the Federal Reserve (Fed) to ensure adequate global access to dollars. The build-up of US debt during the pandemic poses a long-term risk to the dollar's status if US growth weakens permanently.

Applying multivariate-fractionally integrated volatility analysis on emerging market bond portfolios

This study examines emerging market (EM) local bonds from a portfolio risk perspective and suggests methodologies for risk evaluation, on which the literature is limited. Despite the growth of EM bond funds in recent years, comprehensive studies regarding this industry have been scarce. In light of this, 203 different local bonds of EM countries—Indonesia, Brazil, India, South Africa, Mexico, and Turkey—are elaborated in terms of return, volatility, and cross-correlation features. This study focuses on an untouched field—long memory properties—and the application of fractional models to EM bond portfolios. Based on the outcomes of a dynamic conditional correlation and fractionally integrated generalized autoregressive conditional heteroscedasticity approach and related value at risk analysis, the study finds that fractional models are useful tools for risk management, as they deliver satisfactory empirical results for several static and dynamic versions of EM bond portfolios.