By Keith Balmer, BMO Global Asset Management Director and Portfolio Manager within the BMO GAM multi-asset investment team
The Green Agenda was a big part of the Conservative Party’s election manifesto, and September sees the first issuance of a ‘green gilt’, with a second issuance scheduled for October. The government plans to raise £15 billion through the issuance of green gilts this financial year, but with the government yet to publish details on its Net Zero strategy and the Heat and Building strategy, is this just a face-saving policy ahead of the UK hosting the COP26 climate conference in November?
Pivotal to the government’s plans for the UK’s financial services industry post-Brexit, is to make London a centre for green financing, and the two green gilt issuances sound like a good start. But with the backdrop of a woeful lack of information on the rest of the green agenda, the issuance overshadowed by the EU’s planned €250 billion of green issuance, and the government’s seemingly contradictory policies such as the new Cumbrian coal mine1 this issuance seems more of a drop in the ocean than the big splash the government wants to make before the Glasgow-hosted summit.
Green vs traditional
The green gilts will have the same structure as traditional gilts, but the money raised will be linked to sustainable initiatives. Due to increased demand for sustainable financing, it is anticipated that the green gilts will trade at a premium over and above the level of a traditional gilt of the same maturity profile – coined as a ‘greenium’. Since the overall issuance of green gilts will be much less than traditional gilts, liquidity could impact pricing. And the need to both monitor and report on the use of proceeds means that the costs of issuing green bonds will be higher than traditional bonds. Will the greenium offset these cost-accretive factors?
What will the proceeds be spent on?
In November 2020, the government published its Ten Point Plan for a Green Industrial Revolution. Within this plan are the sorts of initiatives that would be eligible for financing from green bonds, such as cleaner public transport, the manufacture of zero-emission vehicles, offshore wind farms, amongst many others. But the total estimated spend of this plan adds up to £12 billion, less than the green gilt issuance planned in just the first year. The government published its Green Financing Framework in June this year, but there remains much detail to be nailed down about the underlying initiatives.
Late to the party
The government is already late to the green bond party, with Poland, France, Germany and Italy having all already issued green bonds; Poland back in 2016. However, there can be disadvantages in being a first-mover. These bonds were issued before of the finalising of the full set of EU standards that green bonds should adhere to, thus producing issues on how to deal with early bonds that don’t meet these standards. Although the government is yet to finalise its own green bond framework, this is likely to be done ahead of the bulk of the planned issuance, and the UK can draw on the work already done by the EU.
Both behind and ahead of the curve
The global green bond market (sovereign and corporate) passed an impressive milestone in 2020 of more than $1 trillion of issuance2. Disappointingly, the UK accounted for less than 5% – not a market-leading percentage. But, as the UK government has been late to market, its issuance is likely to grow significantly. And the hope is that this will create impetus for corporates to issue more green bonds; more financing to go towards sustainable initiatives.
Alongside the green government bonds, later this year, retail investors will be able to invest in Green Savings Bonds via the NS&I, part of the Treasury, with the money being invested in sustainable initiatives. This savings scheme is ahead of the curve, being the first standalone retail product tied to a government green bond.
