The UK took a significant step closer to joining the growing ranks of sovereign green bonds issuers with the announcement in the new budget of a commitment of at least £15 billion of green gilt issuance in this financial year.
The green gilt announcement follows a commitment made last year by Chancellor of the Exchequer Rishi Sunak that the UK will issue its first green bond, with proceeds used to help enable the UK meet its 2050 net zero target and other environmental objectives. According to the new budget delivered by Sunak, a Green Gilt Framework will be published in June, followed by an initial issuance in the summer. The Framework will detail the types of expenditures that will be financed to help meet the government’s environmental objectives, and will also include future reporting arrangements, including frequency of reports, fund allocation, and the environmental impacts of the programme spend.
With the issuance of its initial green bond, the UK will join the rapidly growing sustainable sovereign debt market. In February, Italy announced the publication of a new green bond framework, and other countries such as Germany also recently issued their first green bonds. The European Union is set to become a central region for sovereign sustainable finance, with 30% of the European Commission’s €750 billion NextGenerationEU multi-year recovery budget earmarked to be finance through green bonds.
The UK budget also included plans to build a ‘green curve,’ a yield curve specifically for green bonds showing the yield of the bond against its maturity, highlighting the value of the sustainable characteristics of the bond. This follows a similar measure introduced by Germany when it issued its inaugural green bond, using a “twin bond” model by issuing the securities alongside existing conventional securities with matching characteristics, including maturity and coupon.
The budget also included plans for the introduction of a green retail National Savings and Investment (NS&I) product. According to the budget, this product, expected to be offered in summer 2021, will be closely linked to the green bond framework, and will aim to give UK savers the opportunity to take part in the collective effort to tackle climate change, benefiting from the reporting standards of the green gilt programme.
In addition to the green bond program, the budget also provided more details on the UK’s plans to establish an ”infrastructure bank,” aiming to promote infrastructure investment to help tackle climate change and promote economic growth. The institution is expected to begin operating later this spring, and will be headquartered in Leeds. It will be able to deploy £12 billion of equity and debt capital and be able to issue up to £10 billion of guarantees, and will offer a range of financing tools including debt, hybrid products, equity and guarantees to support private infrastructure projects.
Investment and sustainability groups welcomed the budget’s sustainable finance moves, including its plans for a green curve, and the new retail green savings product.
Matthew Kuchtyak, Assistant Vice President – Analyst at Moody’s Investors Service, said:
“The UK’s plan to issue its debut sovereign green bond later this year is the first step on its path to building out a green gilt yield curve and represents another example of a large sovereign entering the sustainable bond market, like Germany in September 2020. We expect global issuance of green, social and sustainability bonds to hit a record $650 billion in 2021, with sovereign issuance continuing to expand globally as governments respond to growing investor demand and increasingly link their financing strategies with their climate objectives.”
Sarah Gordon, Chief Executive of the Impact Investing Institute, said:
“The UK’s green gilt programme will raise much-needed funds to address the climate emergency, and today’s commitment to deliver explicit social benefits alongside environmental impact is a great step forward. This demonstrates the ability of the UK and its financial services sector to show innovative leadership in sustainable finance.”
“It is extremely positive that the Government is making it possible for individuals to save for positive environmental impact, by announcing a green retail savings product that will be launched in the summer. We know that people want to make a difference with their money and green retail bonds will be available to all in answer to that need. It will be one of many ways for individuals to demonstrate the power in their pockets, which comes on the back of a larger consumer trend to demand a greater commitment to sustainability from companies around the globe.”