UK Budget reveals “missed green opportunities”, say fund managers

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Investors have criticised the UK Budget for missing opportunities to prioritise the green economic transition, as Chancellor Rishi Sunak unveiled the government’s spending plans for the year ahead. 

The government announced a number of green initiatives, including government funding for net zero innovations, the issuance of sovereign green gilt bonds, and a “green savings bond” for retail investors.

For the most part, the Budget focused on extending pandemic relief measures, such as the furlough scheme, VAT cuts for hospitality and tourism, and the stamp duty holiday, as well as announcing controversial plans to hike corporation tax from 2023.

"It is going to take us a long time to fully recover from the damage coronavirus has done to our economy," said Sunak at a press conference on Wednesday.  

Sunak emphasised the economic blow of coronavirus pandemic which has caused the economy to shrink by 10 per cent and more than 700,000 people to lose their jobs since March 2020. 

“The “Green” agenda of this budget is not as dramatic as suggested by some,” says Stephen Payne, portfolio manager at Janus Henderson Investors.

“The issue of “green” gilts will help fund projects to tackle climate change and potentially attract ever more ESG-focused investors, whilst there is also a new National Savings green product.”

The UK will issue GBP15 billion of sovereign green bonds this year to fund sustainable infrastructure and climate change initiatives, with further issuance expected to follow later in 2021 to build out a ‘green curve’. 

Peter Bachmann, managing director of sustainable infrastructure at alternative asset manager Gresham House, considers the proposal to lack consistency. 

“While we welcome the announcement of GBP15 billion of green gilts, the previous chancellor said it would cost up to GBP1 trillion to decarbonise the UK, including GBP450 billion alone for the heat system,” says Bachmann.

He notes that the government’s net-zero plan commits to 600,000 heat pump installations per year, but at a cost of typically GBP10,000 per installation, it is unclear how this will be funded. 

Alongside green gilts, the Budget also saw the announcement of a “world first” green retail savings product through the Treasury-backed National Savings & Investments in the summer of 2021.

Simon Bond, manager of Columbia Threadneedle UK Social Bond Fund, says this could “help strengthen retail investors’ involvement in the green investment revolution”. 

“Whilst it may not by itself make a significant impact in paying for green transition or infrastructure, it is inclusive and it taps into people's desire to express their green credentials and to do good through their investments,” says Bond. 

The details of the savings bond are not yet clear, but Bond says that a “key driver of success” will be around the yield offered and the maturity profile of the product.

“This bond might not raise significant funds without offering more attractive rates than Gilts. However, the bond might be advised to target a shorter maturity date (for example five years) for retail whereas our clear view is that UK Green Gilts should target longer dated institutional demand,” says Bond. 

The Budget also updated The Bank of England’s remit to include a duty to support the government’s net zero carbon ambition alongside its responsibility to set monetary policy and keep inflation under control.

Katharine Neiss, chief European economist, PGIM Fixed Income, says the Bank of England is “the first major central bank to have climate change incorporated in its mandate” and adds that the move “reaffirms the UK’s leadership in addressing the climate challenge”.

Elsewhere, the government set out GBP100 billion of ‘Build Back Better’ infrastructure spending in the coming year, and a GBP22 billion UK Infrastructure Bank based in Leeds was announced. 

Gresham House’s Bachmann claims these initiatives lack teeth when it comes to biodiversity, carbon taxes, and ‘building back better’.

“Despite its stated ambition to be a leader on climate issues, the UK government has missed the opportunity to take the lead by applying an appropriate carbon tax. What makes this omission worse is the decision to freeze fuel duties.” 

Bachmann compares this to the US President Joe Biden’s government’s recent calculation of the social cost of greenhouse gases at USD50 per ton.

The Budget also did not mention the new Environment Bill, which will set out a framework by which ministers can impose new targets on biodiversity, air pollution, water quality, and resource use.

“The UK government, as host of the upcoming 2021 UN climate summit in Glasgow, has already expressed its ambition to be a global leader in the fight to save nature, and to implement nature-based solutions to climate change. It is expected to repeat these promises at a forthcoming UN summit on biodiversity on 30 September,” says Bachmann. 

“However, according to the UK government’s own assessment of performance, the UK has failed in its contribution towards this global goal. The UK’s Sixth National Report, published by the UK Government in March 2019, shows the UK will miss nearly all its commitments for nature made in 2010 – 14 out of 20,” says Bachmann.

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