The Budget is coming up: will we see a UK sovereign green bond?
With more governments around the world issuing green bonds, Maria Busca looks at whether HM Treasury will follow suit.
In May 2018, the Environmental Audit Committee called for the Government to consider issuing sovereign green bonds (SGB), in order to set a benchmark of good practice. An SGB is a debt security specifically designed to support climate-related and environmental projects. Following legislation for net-zero by 2050, asset managers including Columbia Threadneedle wrote to the City Minister and the Debt Management Office calling for the Government to issue green gilts (bonds). The letter noted significant appetite among investors from pension funds to insurance groups for investments that support the UN’s sustainable development goals (UNSDG).
The rise of sovereign green bonds?
In the past year, an increasing number of states started issuing sovereign green bonds. The Netherlands and Sweden are amongst the most recent nations to do so, with Germany due to launch its first green bond in the second half of 2020. However, the UK Government has made no hints to join them, despite UK investors being some of the top buyers of green bonds.
The Government’s position
When launching the Green Strategy in July 2019, the Government poured cold water on any suggestions to issue a sovereign green bond, citing cost-effectiveness: “the core gilt programme […] remains the most stable and cost-effective way of raising finance to fund day-to-day government activities (including existing and new green expenditure)”. The strategy also argued there were no significant barriers to green issuance.
This year, Gareth Davies, a new MP and former head of responsible investment solutions at Columbia Threadneedle Investments, tabled a written question pressing for an update on plans to issue green gilts. The Government indicated that new financing instruments would be introduced only if they; met value-for-money criteria, enjoyed strong and sustained demand and were consistent with the wider fiscal objectives of government.
The head of the Debt Management Office, the Treasury agency in charge of raising government funding by issuing (selling) government bonds, also discouraged such a development. In an interview with the FT, Robert Stheeman said that green bonds tended to be smaller, resulting in a liquidity premium which the market would be disinclined to pay. However, this has been disputed.
Is the new Chancellor likely to change direction?
The Treasury’s plans for gilts issuance during the 2020-21 financial year will be published on the same day as the Budget. Earmarking proceeds for environmental purposes would necessitate a change in law. It is rumoured that the Chancellor may announce a raft of measure to tackle climate change. So, could a green gilt be one of them?
The benefits of issuing green gilts include reaching green investors, and encouraging more corporates to issue green bonds themselves, thus creating a bigger market. However, it would also make the statement of being committed to tackling climate change and to reaching the net-zero target by 2050. According to the Green Bond Principles, the Government would need to declare the environmental benefits, manage the proceeds separately, report annually, and remain open for external audits and third-party certification.
However, issuing green bonds opens the Government to the risk of failing to meet the criteria of evaluators or investors, which includes the Government’s overall sustainability strategy. The evaluation frameworks are also arguably a moving target, subject to investor’s views and understanding of climate change. For instance, if one was to consider the whole supply chain of building new infrastructure, financing such a project may be rendered a more brown shade of green and no longer satisfy green investors as their understanding changes.
Where do voters and stakeholders stand on this?
In October an Opinium survey found that almost two-thirds of people thought climate emergency was the greatest issue facing humankind, with 63 per cent supporting a Green New Deal - a long-term investment in green infrastructure. An Ipsos Mori poll found that voters care more about the environment than they care about the economy and poverty. Whilst specific public demand for sovereign green bonds is unlikely to emerge, the sense of voter urgency should not be doubted. Leaving aside public opinion, stakeholders have not exerted significant pressure on the Government to issue green bonds, with the exception of asset managers.
Ultimately, the decision to issue green gilts will not be made shortly. In November, the Government launched a review into the cost of net-zero and how it should be distributed. The Treasury will likely wait for the publication in the autumn before any steps are considered.
With the Committee on Climate Change estimating the economic cost of transitioning to net-zero at £50bn per year, the Government will be expected to shoulder some of the burden. Fortunately, demand for green investments has been rising, but further pressure is needed before we can expect the Treasury to issue green gilts.
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10 March: Treasury committee takes evidence on Decarbonisation: is HMT playing its part in net-zero?
11 March: Budget Day
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19 March: Finance Bill is published
20 -22 March: Climate Assembly
TBC – April: Climate Assembly publishes report
Autumn 2020: Government publishes review on the cost of the transition to net-zero and how it should be distributed