Green Gilts: An empty gesture or a catalyst for decarbonisation?

Earlier this month Chancellor Rishi Sunak announced the issuance of the UK’s first green bonds, following a trend first set by Poland in 2016 and subsequently adopted by European nations such as Germany and Sweden. The announcement follows sustained pressure from Columbia Threadneedle, a 352 billion EUR investment group, citing an appetite from pension funds and insurance groups, among others, for green gilts in the UK. 250 billon USD in green bonds were sold globally last year, accounting for 3.5% of total bond issuances in 2019. Currently the market for green bonds issued in sterling is valued at 111 billion GDP, creating a disparity between supply and growing investor demand. However, with Sir Robert Stheeman, head of UK Debt Management Office, suggesting in June that green issuances have a merely ‘symbolic’ effect, it is worth considering how far will the gilts actually go towards achieving the UK’s carbon goals.

 

Green bonds ensure that capital raised from the issuances are directed towards environmentally friendly projects, although the criteria is ambiguous. Sunak’s announcement aligns with Prime Minister Boris Johnson’s vision for a green industrial revolution, which focuses on hydrogen and carbon capture and storage (CCS) as a priority. The green gilts will come as a boost to projects such as HyNet North West, which aims to create the UK’s first carbon capture and CCS infrastructure. Currently, HyNet’s commitment to clean energy saves over one million tonnes of carbon dioxide each year, the equivalent of taking more than 600,000 cars off the road.

 

Private industry welcomed the announcement of the UK’s first green gilts, described as ‘a clear commitment to the environment, to both investors and future generations’ by Peter Harrison, Chief Executive at Schroders. In addition, NatWest, who often feature in UK-based sustainable equity funds, used the opportunity to intensify their efforts to fund a greener economy by backing ‘Financing a Just Transition Alliance’. This initiative aims to further the progress made on building a more equitable economy. Barclays, who themselves raised 400 million GDP in green bonds in October, have vastly outperformed the benchmark in the month since, prompting an alignment with Sunak’s announcement among banks seeking a boost to their image among investors.

 

The issuance of Germany’s green bonds in September, which raised over 6 billion EUR, reflects burgeoning demand from investors for ethical options in the market. The bonds were priced for a yield of -0.4635%, ensuring that investors looking to bolster their green credentials paid a 1 basis point premium. In the same month, Sweden raised 20 billion SEK through the issuance of its first sovereign green bond at a coupon of 0.125%. The UK’s commitment to selling green bonds, therefore, comes as a relief for investors and activists who suggest the UK is at risk of falling behind Western Europe on ESG commitments. ‘Green gilts are essential in maintaining the UK’s position as a global leader in green and sustainable finance’ said Rhian-Mari Thomas, chief executive of the Green Finance Institute.

 

The extent to which green bonds are responsible for actual change, however, remains unclear. For example, in Germany’s 2019 budget, 12.7 billion EUR was directed towards decarbonisation measures, suggesting that the Bund Programme does not itself drive financing for new clean energy initiatives. Moreover, there is little reassurance to bondholders that capital raised from the gilts will directly finance sustainable projects. This scenario was realised the summer when Bilbao-based BBVA raised 1 billion EUR in tier 1 green bonds, the riskiest form of bank debt. This prompted investors to question the bank’s ability to commit to its sustainable criteria and ultimately provoked accusations of ‘greenwashing’, a practice which gives the perception of having strong ESG credentials while doing little to actually contribute towards sustainable goals.

 

Evidence of the Conservative government ‘greenwashing’ has already begun to mount. Mr Johnson’s pledge of 500 million GDP in support for nuclear reactors, a quarter of the amount initially considered, dealt a blow to engineering companies such as Rolls Royce and Atkins, already damaged by the COVID-19 pandemic. Despite the seemingly inexorable optimism surrounding sustainable investing, it appears that the green gilts are an effective symbol for Mr Johnson’s vision for a net zero UK, but are unlikely to have a lasting impact.

 

By Jack Walsh

Sector Head: Sophia Li

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