In the Chancellor’s speech on the green future for UK financial services this week, Rishi Sunak announced the issuance of the first Sovereign Green Bond in the UK in 2021, which will help meet the country’s 2050 net zero target. This coincided with plans to mandate climate-related financial disclosures across the economy by 2025, among other measures.
There is an increased focus on environmental, social and governance issues among UK investors and a number of green bonds issued by other European governments already, so the UK decision to introduce green gilts now is actually long overdue. As with any new issue, the bond will be ‘subject to market conditions’, a reminder that there are no certainties yet.
Funds raised by the UK government under this scheme must be directed at renewable and clean energy projects. The timeliness of the move is significant – governments can issue debt while rates are at historic lows, meaning they can secure green funding as cheaply as possible. The UK government still has to define what criteria will be used to define eligible investments.
Corporate and government issuance of green bonds has been growing in the last few years (over $1 trillion in total) and green bonds are now very popular in Europe, with Poland (in 2016) and France (in 2017) the first to issue green bonds.
“Companies have led the issuance of green bonds and this has highlighted to governments the benefits of using them as a way to finance projects with environmental benefits,” commented Dzmitry Lipski, Head of Funds Research at interactive investor. “Through the issuance of green bonds governments can support their climate change and sustainability targets.”
For example, in 2019, the UK became the first major economy in the world to pass laws to end its contribution to global warming by 2050. The target will require the UK to bring all greenhouse gas emissions to net zero by 2050.
Becky O’Connor, Head of Pensions and Savings for interactive investor, said: “A lens on the environmental impact of investment decisions makes sense not just for the future of the economy, but for individuals’ pensions and other investments, too. Even if you are not subscribed to the movement towards sustainable investing out of environmental concern, it is now widely accepted that there can be material financial climate-related risks within companies.”
O’Connor argues that such risks need to be made apparent for the sake of all investors, whose capital could be at greater risk of loss than they realise, for example, through the risk that fossil fuel assets become unburnable as a result of global net zero targets.
These measures can help put climate risk right up there in importance with other considerations for investors and will help them make more informed choices about where to invest, if climate-related risks concern them.
Green bonds currently tend to trade at a premium. This is largely a factor of supply and demand. Very few governments have tapped the market with green bonds, although a number of companies have issued them.