The UK is set to launch its first sovereign green bonds for retail investors as part of the UK’s Budget set out by Chancellor Rishi Sunak. The green bonds will fund part of the 1 billion GBP Net Zero Innovation Portfolio and will allow retail investors to buy into UK-led projects such as offshore wind farms and carbon capture technology. The Treasury has said that this initiative will fund a 20 million GBP competition to develop a floating offshore wind project, 4 million GBP towards a biomass feedstocks program, and a 70 million GBP competition to deliver a long-duration energy storage prototype. The move has been seen as the UK’s effort to support its credentials as the leader of sustainable finance before the international climate summit, known as COP26, in November. As part of the Budget, a new inaugural green gilt will also be available for institutional investors to aid the financing of green projects within the UK.
The UK is not the first to issue sovereign green bonds; France sold its first sovereign green bonds in 2017. Germany and Poland also issued their own in the following years. Italy announced its sovereign green bond under its new budget at the end of February and Pakistan is set to issue up to 1 billion USD of its ‘nature-performance’ bonds to reduce its reliance on coal.
Green bonds have become increasingly popular over the last two years, with the predicted issuance of green bonds exceeding 800 billion USD before 2021. An additional 360 billion USD worth of green bonds are likely to be issued in 2021. Green bonds have become increasingly popular with ESG minded investors as these funds are required to be spent on eligible categories set out by the International Capital Market Association. The International Capital Market Association is a self-regulatory organisation that aims to ensure high standards of market practice and appropriate legislation. These categories include renewable energy, clean transport, wastewater management, and climate change. For certain bonds such as the Clean Renewable Energy Bonds (CREBs) or Qualified Energy Conservation Bonds (QECBs), the U.S. federal government gives tax credits of up to 70% of the value of the purchased bonds. Green bonds are currently the dominant force in the sustainable debt market, but the demand for social and sustainable bonds has become greater.
The UK government set out their ‘Ten Point Plan for a Green Industrial Revolution’ in November last year. The publication presented a step-by-step plan on how the government will invest 12 billion GBP into green technology by 2030. An extra 42 billion GBP of external funds were also required to meet these goals. The funding will be used to advance offshore wind, produce low carbon hydrogen, move to zero-emission vehicles, enable green aviation, and much more.
The UK has one of the most optimum offshore wind conditions in the whole of Europe. These conditions could allow the UK to become one of the largest producers of offshore wind energy. The UK’s goal is to produce 40GW by 2030, including 1GW of energy produced by the new floating wind farm innovation. With the rapid development of offshore wind turbines, such as the new 15MW Vestas turbine, the UK will likely surpass this goal.
With the new offshore wind infrastructure, the UK could become one of the leading powers in green hydrogen production. Currently, ITM POWER, a company based in Sheffield, has a 1GW green hydrogen electrolyser. This capacity is sufficiently more than many of its competitors around the world. The National Grid and Ofgem are investigating the percentage of hydrogen that could be blended into the natural gas pipelines to be used to heat homes. The results have been promising for low to medium hydrogen blending.
By 2035, the UK roads will only contain zero-emission hydrogen, hybrid, and electric vehicles. With the initial shift occurring at the beginning of 2030, no new petrol and diesel cars and vans will be allowed to be purchased, and all vehicles will be required to have a significant zero-emission capability. The aviation industry will also have a green shift. In September 2020, the first commercial hydrogen fuel cell aircraft took off in the UK. The UK is investing 15 million GBP into research to produce the first zero-emission passenger aircraft set to fly from 2030.
The response to the inclusion of the sovereign green bonds into the UK’s Budget has been very positive. Sarah Gordon, the Chief Executive of the Impact investing Institute, believed it is a step in the right direction. Corporate investors, however, such as Mitch Reznick, head of sustainable fixed income at Federated Hermes, expressed their fear regarding the premium they may have to pay compared to other bonds. The predicted investment needed for Europe to reach their net-zero goals is around the 1 trillion EUR mark, which leads to question whether the 58 billion GBP investment planned by the UK government will be sufficient to allow the UK to be net-zero by 2050. Fortunately, companies are required to be more accountable for their ESG impact by investors, and this should benefit the UK in reaching its net-zero goal in 2050.
By James Watson-Gandy
Sector Head: Sophia Li