Sustainable Investing and Environmental Markets by Dr. Richard Sandor

CFS Advisory Board member Richard Sandor and his co-authors Murali Kanakasabai, Rafael Marques, and Nathan Clark, recently released Sustainable Investing and Environmental Markets: Opportunities in a New Asset Class.

With a combination of over 50 years of practical experience in the field of environmental finance, the authors provide a solid preliminary understanding of the promising and transformational new investment category of environmental assets. There is currently no equivalent book in the market that covers environment-financial issues from a practitioner’s standpoint. Bringing together economic theory and practical experience, the twelve chapters cover three broad asset classes: air and water; catastrophic and weather risk; and sustainability. It demonstrates how these environmental asset classes are being incorporated into commodities, fixed income, and equity instruments. The book concludes with some insights into the current state of this emerging asset class, some “food for thought” and an analysis of future trends.

The book’s foreword is by world-renowned energy and sustainability expert Amory Lovins, co-founder and chief scientist of the Rocky Mountain Institute.

The foreword and chapter 1 of Sustainable Investing and Environmental Markets can be read here.

More on Euro-area Divisia Money Supply

Picking up on Zsolt Darvas’ euro-area Divisia aggregates, two economists from around the world have already picked up on the Divisia aggregates and used them in their analyses:

    Marcus Nunes compares European and U.S. money supply in “Money, Money, Money” to make sense of different economic behavior.

Euro-area Divisia Aggregates Now Available through Bruegel

Bruegel Senior Fellow Zsolt Darvas created and made available euro-area Divisia aggregates. The new dataset includes monthly data from January 2001 onwards on euro-area simple-sum and Divisia money aggregates corresponding to the ECB’s M1, M2 and M3 aggregates for:

    Euro area (changing composition);
    The first 12 members of the euro area;
    Break-adjusted euro area (changing composition) “notional outstanding stock” calculated by cumulating transactions.

The dataset can be downloaded from Darvas plans on updating the dataset in the future so bookmark this page.

Mr. Darvas has also released a working paper, “Does Money Matter in the Euro Area? Evidence from a New Divisia Index” where he examines the possible role of money shocks on output and prices in the euro area. Highlights from his paper are:

  • Standard simple-sum monetary aggregates, like M3, sum up monetary assets that are imperfect substitutes and provide different transaction and investment services. Divisia monetary aggregates, originated from Barnett (1980), are derived from economic aggregation and index number theory and aim to aggregate the money components by considering their transaction service.
  • No Divisia monetary aggregates are published for the euro area, in contrast to the United Kingdom and United States. We derive and make available a dataset on euro-area Divisia money aggregates for January 2001 – September 2014 using monthly data.
  • Using structural vector-auto regressions (SVAR), we find that Divisia aggregates have a significant impact on output about 1.5 years after a shock and tend also to have an impact on prices and interest rates. The latter result suggests that the European Central Bank reacted to developments in monetary aggregates. Divisia aggregates reacted negatively to unexpected increases in the interest rates. None of these results are significant when we use simple-sum measures of money.
  • Our findings complement the evidence from US data that Divisia monetary aggregates are useful in assessing the impacts of monetary policy and that they work better in SVAR models than simple-sum measures of money.
  • And finally, read Zsolt Darvas’ blog postMoney Matters in the Euro Area: A New Dataset on Euro Area Divisia Money Suggests that Money Shocks Have an Impact on the Economy.”

    Is Inflation Targeting Still Relevant?

    In his paper titled “Inflation Targeting: A Monetary Police Regime Whose Time Has Come and Gone,” David Beckworth calls on the Fed to advance beyond inflation targeting.


    Inflation targeting emerged in the early 1990s and soon became the dominant monetary-policy regime. It provided a much-needed nominal anchor that had been missing since the collapse of the Bretton Woods system. Its arrival coincided with a rise in macroeconomic stability for numerous countries, and this led many observers to conclude that it is the best way to do monetary policy. Some studies show, however, that inflation targeting got lucky. It is a monetary regime that has a hard time dealing with large supply shocks, and its arrival occurred during a period when they were small. Since this time, supply shocks have become larger, and inflation targeting has struggled to cope with them. Moreover, the recent crisis suggests it has also a tough time dealing with large demand shocks, and it may even contribute to financial instability. Inflation targeting, therefore, is not a robust monetary-policy regime, and it needs to be replaced.


    David Beckworth is a former international economist at the US Department of
    the Treasury and the author of Boom and Bust Banking: The Causes and Cures of the Great Recession. His research focuses on monetary policy. Currently he is an assistant professor at Western Kentucky University.

    Read the paper at

    The Bretton Woods Transcripts Receives ESHET Award

    The European Society for the History of Economic Thought has awarded The Bretton Woods Transcripts the ESHET 2014 Best Scholarly Edition Award. Congratulations to the editors – Kurt Schuler and Andrew Rosenberg – who will be invited to organize a Bretton Woods Transcripts session at the next ESHET conference.

    For more on the book and links to the Bretton Woods Project and historic documents and memorabilia:

    “Money Still Matters” by Michael Belongia and Peter Ireland

    Today’s Manhattan Institute article by Peter Ireland and Michael Belongia is worth highlighting. Building on their new working paper, which we blogged about last week, Ireland and Belongia again make the case that money, when correctly measured, still matters for understanding how monetary policy affects the economy.

    Read the e21 article “Money Still Matters” by University of Mississippi Professor Michael Belongia and Boston College Professor Peter Ireland. Professor Ireland is a member of the Shadow Open Market Committee.

    “Don’t be Fooled by Taper Talk” by Steve H. Hanke

    In this article by Professor Steve H. Hanke from Johns Hopkins University, Professor Hanke uses CFS Divisia measures to throw light on the economy. From January 2003 until the collapse of Lehman, the exponential annual trend growth rate for Divisia M4 was 8.79%. Since the Lehman collapse in September 2008, the exponential annual trend growth rate for Divisia M4 has been 0.77%. The decline can be attributed to a drop in bank money. Based on the anemic annual Divisia M4 growth rate of 2.6%, Hanke forecasts that the Fed will be forced to keep interest rates at the lower bound for longer than expected – and perhaps even into 2016.

    For those looking to gain an intuitive understanding of Divisia measures and how they differ from the Fed’s simple sum measures, this article is well worth reading.

    Read “Don’t Be Fooled by Taper Talk” by Steve H. Hanke.

    Interest Rates and Money in the Measurement of Monetary Policy

    There is a very interesting, new study by Michael T. Belongia and Peter N. Ireland on interest rates and Divisia aggregates in the measurement of monetary policy.

    Peter Ireland is a professor of economics at Boston College; a research associate at the National Bureau of Economic Research; and a member of the Shadow Open Market Committee. Michael Belongia is a professor of economics at the University of Mississippi and prior to that was a research economist and economic adviser at the Federal Reserve Bank of St. Louis.


    Over the last twenty-five years, a set of influential studies has placed interest rates at the heart of analyses that interpret and evaluate monetary policies. In light of this work, the Federal Reserve’s recent policy of “quantitative easing,” with its goal of affecting the supply of liquid assets, appears to be a radical break from standard practice. Alternatively, one could posit that the monetary aggregates, when measured properly, never lost their ability to explain aggregate fluctuations and, for this reason, represent an important omission from standard models and policy discussions. In this context, the new policy initiatives can be characterized simply as conventional attempts to increase money growth. This view is supported by evidence that superlative (Divisia) measures of money often help in forecasting movements in key macroeconomic variables. Moreover, the statistical fit of a structural vector autoregression deteriorates significantly if such measures of money are excluded when identifying monetary policy shocks. These results cast doubt on the adequacy of conventional models that focus on interest rates alone. They also highlight that all monetary disturbances have an important “quantitative” component, which is captured by movements in a properly measured monetary aggregate.

    CFS Comment: In a well known paper, Bernanke and Blinder (1988) argued that central bank policy targeting credit supply is more stabilizing than monetary policy targeting money supply, if credit demand is more stable than money demand, and visa versa. But the large shocks to credit demand that have occurred since 2007 have caused credit markets to become conspicuously unstable, suggesting that we now are in an environment in which focus on money supply has become more important than focus on credit supply.

    Click here to read “Interest Rates and Money in the Measurement of Monetary Policy.”

    Banca d’Italia’s Financial Stability Report

    Bank of Italy’s most recent FSR became available earlier this month. Below is the Bank’s summary:


    The global expansion proceeds at moderate and regionally uneven rates – The world economy continues to expand moderately with differing regional performances. In Europe the recovery has also involved the countries hit by the sovereign debt crisis. In some of the emerging economies with structural imbalances, growth has slowed and capital outflows have been recorded.

    In Europe financial conditions improve in the countries worst hit by the sovereign debt crisis … Financial conditions in the euro area have improved in the last few months. The reduction in the spread on government securities, which has been more pronounced since last autumn, mainly reflects the subsidence of fears of a break-up of the single currency, thanks to signs of economic recovery, the effects of fiscal consolidation and the introduction of reforms in a number of countries, the Eurosystem’s initiatives and the progress made towards Banking Union.

    …but the risks are still considerable – Significant risks remain, especially as regards the evolution of the macro-economic situation. Negative consequences for growth and financial stability in the euro area could come from a worse than expected slowdown in the emerging economies or an unexpectedly protracted period of low inflation. Uncertainties also stem from the geopolitical tensions in various parts of the world, in particular the crisis between Russia and Ukraine. On the other hand, the risk that the less accommodative monetary policy stance in the United States might cause an increase in medium and long-term interest rates in the euro area as well has lessened, although it has not disappeared.

    In Italy the slow improvement in the macroeconomic situation continues – In Italy the economic recovery is spreading, but it remains fragile. The real estate market is still weak. House prices are still declining, although the fall in non-residential property prices has come to a halt. Foreign portfolio investment in Italy has increased, both in government securities and private-sector securities. Interest rates have declined on all maturities.

    The financial conditions of households are sound … In 2013 households suffered a smaller decline in disposable income than in 2012; there was a reduction in debt and a recovery in investment in financial assets. Low interest rates and measures to support borrowers helped to contain the vulnerability of indebted households. It is estimated that the proportion of financially fragile households would increase by only a modest margin even under adverse macroeconomic scenarios.

    … but those of firms are still difficult – Although some positive signs are emerging, the financial conditions of firms remain weak. Several large companies have substituted bonds for part of their bank debt; for smaller firms, difficulties in accessing credit, low liquidity and the uncertainties still surrounding the cyclical upswing will remain the main sources of risk in the coming months.

    The Comprehensive Assessment is under way – The Comprehensive Assessment of the largest euro area banks is now in progress. The exercise, in which 15 Italian banks are taking part, will permit uniform comparison of bank balance sheets in different countries, helping to reduce the segmentation of European financial markets still further.

    Market assessments of Italian banks improve – In the first few months of the year the markets’ evaluations of Italian banks improved considerably, bringing them nearer to those of banks in the other main euro-area countries.

    The contraction in credit eases – The contraction in bank lending abated somewhat at the start of 2014. Qualitative surveys of banks found more favourable conditions for credit to households; the conditions of credit access for firms, though slightly better, remain restrictive.

    The deterioration in loan quality slows – The deterioration in banks’ loan asset quality has eased. The flow of new bad debts as a ratio to outstanding loans stabilized in the fourth quarter of 2013, and preliminary data indicate that in the first quarter of 2014 it declined. However, the volume of non-performing loans is still growing.

    Loan loss provisions hit profitability but significantly raise coverage ratios – The massive loan loss provisions entered in the banks’ accounts at the end of 2013 completely absorbed operating profits, but at the same time they resulted in a significant rise in coverage ratios. This development was welcomed by the markets and may help to revive the market for non-performing loans. Some large banks have announced initiatives to optimize the management of these exposures. The lowering of banks’ operating costs continued, thanks in part to the rationalization of branch networks.

    Banks reduce their sovereign exposure – Beginning in the second half of last year, Italian banks have reduced the volume of their government securities portfolio.

    The funding gap narrows and repayment of Eurosystem financing proceeds – The funding gap has been brought back down to the levels registered in the middle of the last decade, and the repayment of Eurosystem financing has continued, albeit unevenly across banks. The largest have stepped up their bond issuance on the international markets, returning to positive net issues.

    A number of banks announce capital increases – Italian banks’ capital position deteriorated as a result of the massive loan loss provisions made at the end of 2013. A number of banks have undertaken capital increases for a total of €10 billion. Italian banks’ leverage remains lower than that of other European banks.

    Risks in the insurance sector are modest – For insurance companies the risks deriving from the protracted phase of low interest rates are modest, thanks in part to insurers’ prudent policies on guaranteed-yield policies. The main risks for the sector stem from the tenuous economic recovery. The soundness of the leading companies is now being assessed by the European insurance authority.

    Liquidity conditions in the financial markets are easier – The liquidity of the Italian financial markets has improved further. The systemic liquidity risk indicator is now at its lowest level ever, reflecting heavier trading on the secondary market in government securities.

    Banca d’Italia’s financial stability report can be found on the CFS FSR page.