Why green gilts matter to UK bond investors

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As markets prepare for the upcoming COP26 climate change conference in Glasgow, the UK government can point to the success of its first ever green gilt issuance. Here, Insight Investment head of responsible investment research and stewardship, Joshua Kendall, weighs the significance of the move.

September saw a watershed moment in UK fixed income markets, as the government launched its first ever green gilt, a 12-year bond, maturing on 31 July 2033. Sales from the issuance raised £10bn, the largest inaugural green issuance by any sovereign, with the largest ever order book for a sovereign green transaction1.

Earlier this year the UK Debt Management Office (DMO) also announced plans to issue a second green gilt this Autumn. This is subject to demand and market conditions, but if it does go ahead it is likely to be in the 20-30-year maturity range.

In addition, this year’s green gilt issuance will be followed by the world’s first standalone retail Green Savings Bonds, issued by the UK national savings provider NS&I. According to the Treasury: “These two products will give UK investors and savers the opportunity to join the collective fight against climate change while creating green jobs across the country.”

New climate

With COP26 expected to map out further global moves towards net zero2, the UK government hopes green gilts will ultimately raise a minimum of £15bn for green government projects such as zero-emissions buses, offshore wind power generation and schemes to decarbonise homes and buildings.

Insight Investment head of responsible investment research and stewardship, Joshua Kendall welcomes the latest moves and believes green gilts could prove particularly attractive to large institutional investors such as pensions funds.

We support the UK Treasury’s commitment to issue green gilts. Ahead of the COP 26 conference the UK is showing important leadership with this announcement,” he says.

Pension fund investors, cognisant of their environmental, social and governance (ESG) responsibilities, have already expressed strong interest in green gilts and we expect all the 2021 issuance to be well-received subject to suitable issue format.”

To reach its target of net zero emissions by 2050, the UK government published a ten-point ‘green industrial revolution’ plan1 which recent and planned green gilt issuance are designed to support.

Commenting on the likely success of green gilts and the wider strategy that supports them, Kendall believes close collaboration with the UK financial services industry could help the government deliver on specific sustainability targets.

The gold standard for green issuance is a bond that also contributes to a wide, long-term sustainability strategy. The Treasury will have to think about aligning with the best practice standards already in place by several European nations that have issued green sovereign debt. This includes transparency on use of proceeds, annual disclosure commitments, and short and long-term implementation targets.”

To support this, a recently published green financing framework outlines how the UK government intends to finance environment-related expenditures through the issuance of green gilts. The framework details how potential projects will be identified and selected, and how the proceeds and impacts will be verified and reported.

Selection and evaluation of projects supported by green gilt funding will be governed by a new Inter-Departmental Green Bond Board (IDGBB) and chaired by the UK Treasury. Annual evaluation will consider alignment with eligible expenditure categories and with international standards.

The green financing framework commits to providing separate reports covering proceed allocation and impact. The impact report will consider environmental impacts together with social co-benefits.

Commenting on the government’s framework and the likely benefits it could ultimately create, Kendall added: “A strength of the framework is the focus of reporting on the co-social benefits of the green projects.”

The social benefits are likely to include green jobs creation, support for small and medium-sized enterprise, and protecting people’s homes and livelihoods from the impacts of climate change. This emphasises the focus on creating a just transition to a low carbon economy and helps to distinguish the UK government framework from other sovereign green bonds.”

Following the success of this year’s green gilt launch, the UK government looks likely to increase the number of green gilts issued in upcoming years if there is sufficient market interest.

The latest UK move mirrors similar effort to build ‘green’ sovereign fixed income markets in other jurisdictions. In Europe, the European Commission has announced plans for the issuance of up to €250bn of green bonds in the next five years. It  will likely proceed with this new issuance in October, subject to prevailing market conditions3.

1 UK Government – HM Treasury. UK’s first Green Gilt raises £10 billion for green projects. 21 September 2021.
2 Net zero is a target of completely negating the amount of greenhouse gases produced by human activity by reducing emissions and through other methods of absorbing or neutralising harmful CO2 emissions.
3 European Commission. NextGenerationEU: European Commission gearing up for issuing €250 billion of NextGenerationEU green bonds. 07 September 2021.

734534  Exp:  15 April 2022.

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