Some tech hipsters just can’t wait to get their hands on the latest gizmo. Prepared to queue around the block, the early adopters pay a premium for the new thing knowing that there is not much software yet and that it will be cheaper before long.
More sober types wait to see if all the excitement is justified. When it comes to issuing green government bonds, the latest must-have for woke countries, the UK is one of these laggards.
There is a growing list of governments that have launched bonds where the proceeds are ring-fenced for environmental projects. The Netherlands is about to join the club, which includes France, Belgium, Ireland, Poland, Nigeria and even little Fiji. Yet despite pressure from the green finance lobby the UK Treasury has resisted.
On the face of it, this is surprising. Among large developed countries the UK has been one of the most committed to tackling climate change. Welcoming a recent report calling on the government to reduce its emission targets to zero by 2050, Greg Clark, the business secretary, said:
“This sets us on a path to become the first major economy to legislate to end our contribution to global warming entirely.”
Michael Gove, the environment secretary, has said the government recognises “the situation we face is an emergency.” The government is also very keen to reinforce the City’s status as a leading international centre for green finance. In conjunction with the City of London Corporation, the Treasury is backing the formation of a Green Finance Institute.
Cheerleaders argue that government green bond issues will help drive the growth of this type of finance in the private sector. Simon Bond, director of responsible investment portfolio management at Columbia Threadneedle, believes now is the time for the UK government to show leadership by issuing green bonds itself.
But the Treasury seems unmoved.
“There are no plans at the moment to issue a green bond. Any new bond issuance would have to meet value-for-money criteria and fit with the wider objectives of the government,” said the Debt Management Office.
Note the key phrase, “meet value-for-money criteria”. Getting the best value for money for the taxpayer is a religion at the DMO. And when it comes to green bonds that is a problem.
It is true that growing investor demand for “responsible” bonds means issuers can now get better terms than just a couple of years ago. But few suggest the UK government could price green bonds more cheaply than ordinary gilts. The best Threadneedle’s Bond can say is that they would “not necessarily be more expensive” for the taxpayer.
Even if they were no more expensive, green bonds have serious drawbacks from the Treasury’s point of view. The whole idea of green bonds is to earmark the proceeds for environmental projects. Such ring-fencing is attractive to responsible investors because the funds cannot be diverted into other things that they don’t like.
But this is exactly what makes them unattractive to the Treasury, which hates anything that restricts its spending flexibility.
You can easily imagine situations where such constraints could be a problem. In a downturn the government might find itself unable to put more money into the NHS without breaching its budget deficit ceiling because a chunk of borrowing must be used for cleaning up beaches. Politically, that would be very uncomfortable.
Against these drawbacks, advocates cite two main benefits of green finance. One is diversification. As more money pours into such funds they could become an attractive new source of borrowing for governments.
For a small country like Fiji, being able to tap the pool of green funding might make a big difference. But for the UK, the scale of green funding is not big enough to matter.
The second potential benefit is the “signalling” of the issuer’s commitment to curbing climate change. This has surely been a factor in the minds of some corporate issuers of green bonds, particularly those with a less-than-spotless environmental record.
It presumably played a role in the decision by Poland, perhaps the country with the worst environmental image in Europe, to issue the first sovereign green bond in 2016.
But signalling seems a very weak argument for the UK. It is hard to see it convincing those senior Treasury officials who are privately very sceptical about the environmental impact of such bonds. Nor is it likely that launching government green bonds is necessary to bolster the City’s green business.
So it would be no surprise if the Treasury continues to ignore the siren calls of the early adopters. A sensible position might be to wait until green bonds are cheaper and there is evidence that they actually lead to additional environmental benefits. Don’t hold your breath.
Source Financial News