Investors welcome UK green gilt plan as sovereign issuance accelerates across Europe
Fund managers have welcomed plans by the UK government to issue a first sovereign green bond next year, which is expected to bolster green infrastructure projects and move the country closer to its goal of reaching net-zero emissions by 2050.
Simon Bond, who manages social bond funds at Columbia Threadneedle Investments, says that “it has been a long time coming” but that this step offers “tangible evidence” that the UK is “walking the walk, not just talking the talk” when it comes to green finance.
Columbia Threadneedle Investments manages GBP24.5 billion in responsible investment assets and has been advocating the issuance of UK gilts with specific use of proceeds since early last year.
“Green gilts have the potential to scale up the UK’s drive to a net-zero carbon economy and reinforce its reputation as a centre for financial innovation. They can also help ensure that the drive towards net-zero doesn’t come at a cost to those members of society who are least able to bear it, especially following the coronavirus pandemic,” says Bond.
This initial green bond will be the first in a series of new issuances “as we look to build out a green curve over the coming years”, Chancellor Rishi Sunak told the UK’s parliament on Monday.
Bond expects that this series will include issuances with more than one maturity, and that the framework of the bonds is more likely to take after the French OAT benchmark green bonds, as opposed to being “twinned” with a regular bond, a framework that has been implemented recently by Germany.
The UK joins a flurry of new sovereign issuers entering the green bond market in Europe – a pool which already includes Ireland, France, Poland, Belgium, and the Netherlands. Germany is the region’s newest issuer, launching its first EUR6 billion sovereign green bond in September, and planning another bond for November.
The sovereign green bonds issued so far have been hugely oversubscribed, with the German treasury recently attracting more than EUR33 billion of subscriptions for only EUR6 billion of 10-year debt in September,
“I think we should expect at least as much demand for the UK version as we've seen with the initial version in terms of the German and the Swedish,” says Bond.
Sweden's SEK 20 billion issuance in September was more than two times oversubscribed, with the total order book exceeding SEK 47 billion.
Bond says ESG integration is “front and central” for the investment community in the UK, and notes the prevalence of UK investors in the books for Dutch and the French green bonds.
Issuance has been skyrocketing to meet the demand, which has been given a boost from Covid-19. According to Moody’s, global issuance of green, social and sustainability bonds shot up to a record USD99.9 billion in the second quarter of 2020, 65 per cent higher than in the first quarter of the year.
As a manager, Bond says he is delighted that he will soon be able to invest his funds in UK sovereign debt.
“The most liquid bond in the market is the gilt, generally speaking, and so to have access to that, and still know where your money's going and still know that it's doing good for both the environment and also that it's going to be good for society, is really important for me.”
Green bonds have mostly been priced the same or a basis point higher than conventional equivalents. The UK Debt Management Office (DMO) has in the past pushed back against green gilts, saying that it would only be worth issuing them if investors paid a premium for them, which would benefit the taxpayer.
Bond believes that the price should come down to “credit risk, and an element of supply and demand”, and not be swayed by use of proceeds. “Despite the fact that the use of proceeds is restricted, you are still facing the same balance sheet, the same profit and loss account, and, with the government, the same tax raising powers and deficit."
Julien Foll, a responsible investment analyst at AXA Investment Managers also came out in support of the announcement, saying the move sends “a clear and positive signal about the future direction the country is taking” towards a greener economy, in the UK, and also globally.
AXA Investment Managers are among a group of investment managers including BlackRock, Allianz Global Investors, and Credit Suisse, that were already advocating that the UK issue a sovereign green bond.
The UK government's plan was announced as part of a broader green finance programme, and Foll draws attention to Sunak’s plan to mandate large companies to disclose climate risks by 2025 and implement a green taxonomy to judge what activities can be called sustainable.
“It is reflective of the dialogue we have with green bond issuers – we are trying to encourage them to provide details on eligible green projects, and also to provide climate-related disclosures and targets at a company level, and these latest steps from government support that drive,” says Foll.
Foll says that the UK's plan to issue sovereign green bonds could also help spur new issuers, including those outside of Europe. "There have been similar operations from countries like Sweden or Egypt this year, and indeed the broader sovereign green wave started with France and Poland some four years ago. Potentially, we might also now see the US follow this green trend following the Biden election result, and this is very encouraging."
The Biden administration has pledged to spend USD2 trillion on sustainable infrastructure and clean energy, as part of his promise to first eliminate carbon dioxide emissions from the US electric power industry by 2035, and achieve carbon neutrality by 2050.
Josh Kendall, head of responsible investment research and stewardship at Insight Investment, says that the UK is showing “important leadership” ahead of the COP26 conference next year.
Kendall continues: “The UK 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.”
He also notes this has already caught the eye of institutional investors. “Pension fund investors, cognisant of their ESG responsibilities, have already expressed strong interest in green gilts and we expect 2021 issuance to be well-received subject to suitable issue format.”
According to Vanessa Bingle, ESG lead at Alpha FMC, the taxonomy will be a “huge help” when it comes to “making investment managers more accountable”.
Bingle also warns that the green taxonomy, when agreed, will create new hurdles for asset managers. She says that complex disclosures and requirements “present a challenge to many UK asset managers, who will need to upgrade their investment processes, data and technology infrastructure if they wish to remain competitive in this new landscape".