Chancellor of the Exchequer Rishi Sunak has unveiled “a new chapter for UK financial services” with the launch of the UK’s first Sovereign Green Bond in 2021.
In a speech to the House of Commons, Sunak said it would be the first in a series of issuances to meet growing investor demand for these instruments and help the UK achieve its 2050 net zero target.
The bonds will finance projects that tackle climate change, as well as finance infrastructure investment and create more green jobs across the country, the Chancellor said.
The UK will also introduce more robust environmental disclosure standards so that investors and businesses alike can better understand the material financial impacts of their exposure to climate change and price climate-related risks more accurately.
By 2025, a large proportion of businesses including banks, insurance companies, commercial companies, UK-registered large private companies and FCA-regulated pension schemes, will be mandated to disclose the threats to their business from climate change, making the UK the first country in the world to make Task-Force on Climate-related Financial Disclosures mandatory across the economy.
Julien Foll, responsible investment analyst, AXA Investment Managers, said the launch of green bonds sends a “clear and positive signal” about the future direction the country is taking.
Foll said: “AXA IM co-signed an investor letter to the UK government urging for green gilts and we welcome the positive responsiveness to the industry’s engagement. We are pleased to see that it also has been announced that climate-risks related disclosure will be mandatory for major companies by 2025.
“This is perfectly in line with our dialogue with companies, with the industry striving to make efforts to encourage companies to align their businesses with the terms of the Paris agreement.”
Bryn Jones, fund manager, Rathbones, also welcomed the news: “Until now, we have been unable to hold conventional gilts in the Rathbone Ethical Bond Fund because the proceeds of these can be used, for example, for armaments which contravenes our exclusion criteria.
“The step to issue ring-fenced sustainable gilts is something we have been calling for from the UK Treasury for many years. Clearly, the new sustainable bonds will need to meet the financial criteria as well. They will provide another weapon in our arsenal to manage duration, liquidity and risk.”
The UK’s green bond announcement follows similar developments across Europe, where countries such as the Netherlands, France and Germany have launched their own equivalent to ‘green gilts’ over the past couple of years and comes ahead of the UK hosting the COP26 in 2021.
Andreas Billmeier, sovereign research analyst, Western Asset Management, commented: “The UK is quickly catching up with other countries that have already started to build a social and/or green yield curve, including the EU itself. As investors become increasingly concerned about ESG issues, we would expect these bonds find a committed audience.”
However, Billmeier said there remains a question around market distortion as the UK seeks to transition to a greener economy.
“There is a question of shifting borrowing from “standard” bonds to green bonds without affecting market liquidity negatively. In that sense, a period of high issuance is a good window of opportunity to build an additional yield curve and time is of the essence.
“It will be important to see to what extent issuers around the world, including the UK, will want to manage the green curve relative to the traditional curve to avoid market distortions in the transition.
“Some sovereign issuers have actively committed to minimising any spread between the two. That said, we still observe minor differences in yield where corresponding green and brown bonds have been issued – a scarcity premium. In other words – we don’t necessarily expect this scarcity premium to arise, but it is too early to tell in the case of the UK.”
In an effort to help companies understand the impact of their activities and investments on the environment, the Chancellor announced plans to implement a green taxonomy – a framework for determining which activities can be defined as environmentally sustainable.
Thomas Archer, green bond product specialist, Nikko Asset Management, added: “As we go into 2021 the UK will want to take world leadership in green finance as it hosts the COP 26 in Glasgow, and as the country emerges from the COVID-19 induced recession, it will be essential to use green bonds to kick-start investment and provide the capital to fund their investment agenda.
“The announcement of the Green Gilt is a major step forward for the UK in its aspiration to be a leader in green finance and will further the UK’s reach in funding other projects with positive climate benefits. However, although this news is welcome, this is just a start and we look forward to more policies with a green agenda from the Treasury.”