Andrew Hauser: From hot air to cold hard facts - how financial markets are finally getting a grip on how to price climate risk and return - and what needs to happen next

Speech by Mr Andrew Hauser, Executive Director for Markets of the Bank of England, at the Markets Investment Association, London, 16 October 2020.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Introduction

2020 is not the likeliest of years for the green revolution to have started paying off in financial markets. With a global pandemic raging, and economic uncertainty at historic highs, issuers, investors and intermediaries might have been forgiven for having their minds elsewhere.

But, in fact, after many years of rhetoric from market practitioners, the temperature has changed noticeably. Hot air is turning into cold hard fact:

• Climate oriented equity indices have outperformed the broader market by 2-5% in 2020, as economic activity has shifted away from travel and other fossil fuel-intensive sectors, and towards online commerce and technology (Chart 1);
• Green bonds also outperformed their conventional counterparts over that same period (Chart 2), and made up a fifth of total European investment grade issuance in September alone. And companies such as VW and Daimler secured material reductions in financing costs (or 'greeniums') when issuing their first green bonds, linked to the development of low-emission technologies;