As temperatures rise across the world and the focus on environmentally friendly financing intensifies, the UK government is feeling the heat.
Poland, France and the Netherlands are among a handful of European countries that have already issued green sovereign bonds, the proceeds of which are spent by governments on specific environmental projects, such as renewable energy or public transport.
Yet despite becoming the first developed economy to commit to net zero carbon emissions by 2050, the UK is yet to join the club. British investors that want to add an environmental, social and governance (ESG) element to their portfolios are consequently piling money into green projects abroad.
“Most of those opportunities are outside of the UK, within continental Europe where there is a renewed emphasis on tackling, with greater urgency, environmental issues,” says Joshua Kendall, senior ESG analyst at Insight Investment, the UK asset manager.
Interest in green debt has rocketed since the market’s inception more than a decade ago. Global cumulative issuance of sustainable debt, which includes green bonds, broke through the $1tn level in October.
UK investors are hungry for environmentally focused sovereign debt. They were the second-biggest buyers of the world’s first sovereign green bond, lapping up 16 per cent of Poland’s €750m issue in 2016. British investors were also the second-largest buyers of the Netherlands’ near-€6bn green bond, and third-biggest buyers of France’s €7bn green bond in 2017, according to the issuing governments.
When the French government issued more of the same bond last year, for which buyers paid a green premium, British investors bought 28 per cent, just a shade behind France’s domestic institutions, which invested 29 per cent.
The numbers underscore the UK’s strong appetite for green bonds and investors’ willingness to look abroad for projects to fund.
“Our institutions were the most prevalent [foreign] investors in those bonds . . . We’re funding other people’s environmental projects,” says Simon Bond, director of responsible investment at UK asset manager Columbia Threadneedle.
The money raised from France’s green bond is being used to pay for tax credits for organic farmers and sustainable forest management, among other schemes. Proceeds from the Netherlands’ green bond will finance solar and wind energy projects as well as flood defences.
Acting on behalf of the investment group, Mr Bond was one of a number of asset managers who earlier this year wrote to the Treasury to call on the government to issue green gilts. It needs to “walk the walk rather than just talking the talk”, he says, adding: “If you’re a politician, you’re not tapping into the clear demand that would go into a [green] gilt.”
Continental Europe has been at the forefront of green bonds while the UK “has watched a little bit from the sidelines to see how the market develops,” says Lynn Maxwell, Emea head of commercial at S&P Global Ratings, the rating agency.
As well as raising money to fund environmental projects, green bonds offer a level of disclosure on the use of proceeds that appeals to investors. Unlike standard bonds, green debt issuers are obliged to state how much and for which projects the money raised will be spent on.
As head of responsible investment at Columbia Threadneedle, Mr Bond does not buy UK government debt because “we don’t know where the money is going. I need clarity on use of proceeds.” He adds: “The UK is really good at producing . . . liquid benchmark issues. If they could just give me the equivalent in green.”
The Treasury’s reluctance to issue green gilts has had a knock-on effect for sterling-denominated green debt. In the first six months of 2019, £2bn worth of green bonds were sold compared with €65bn globally, according to Climate Bonds Initiative, an international not-for-profit group.
Mr Kendall says: “What we are looking for is leadership, a demonstration that this is important to the government . . . It would send a signal to other institutions.”
Some in the industry, Ms Maxwell included, have few concerns over UK fund managers investing in environmental projects elsewhere: “Capital markets are global and the commitment to sustainability is global as well,” she says. “If an investor is interested in green and they find limited supply in sterling and they focus on other markets, that makes sense.”
In a report last year, the Green Finance Taskforce, an initiative between the UK government and the City of London, said that a sovereign gilt would “directly drive investment into clean growth” as well as “catalyse further issuance of corporate green bonds”.
Despite this, the Treasury’s position remains unchanged and it continues to monitor the case for a sovereign green bond.
Some feel that a lack of clarity around the UK’s departure from the EU is also hindering progress in the green bond sector. “It has created more uncertainty for institutions to try something different, certainly from a government perspective,” says Mr Kendall.
He adds: “Once political uncertainty is resolved, we will see more discussions in the UK market to see how green financing can replicate what’s happening in Europe.”
Source Financial Times