Last Monday (9 November) Chancellor Rishi Sunak announced the UK will issue its first green government bonds next year, in order to capture the growing worldwide demand for ESG investment products.

Green gilts, which have to be directed through clean or renewable energy products, may be new to the UK but have already been launched by European governments including Germany, France and the Netherlands over recent years.

According to data from Statista, 17.5% of all sovereign bonds issued throughout Europe last year were classified as “green”, while Moody’s recently predicted that green bond issuance globally could rise to between $175bn and $225bn by the end of 2020.

The popularity of sustainable investing has rocketed over the past few years as investors have become increasingly aware of the need to look after our planet – before it is too late.

According to research from Refinitiv, more than a third of all equity and bond fund launches this year so far are ESG or sustainability-focused.

In addition, last Tuesday saw the Financial Stability Board roll out its Task Force on Climate-related Financial Disclosures (TCFD) in a bid to improve the reporting of climate-related financial information.

As such, sovereign research analyst at Western Asset Management Andreas Billmeier expects the UK’s new bond issuance to find a committed audience, with other countries that have already taken this step experiencing “very high demand” for green government bonds.

“That said, the taxonomy of what is ‘green’ is still being clarified and acts as a natural speed limit,” he pointed out. “Moreover, there is a question of shifting borrowing from ‘standard’ bonds to green bonds without affecting market liquidity negatively. In that sense, a period of high issuance is a good window of opportunity to build an additional yield curve and time is of the essence.”

Philipp Buff, head of credit research, and Stéphane Rüegg, senior client portfolio manager at Pictet Asset Management, even argued some investors are sceptical of green bonds, as they said it has been difficult to gauge whether the money raised is genuinely channelled to environmental projects.

As such, they believe sustainability-linked bonds – which have coupons linked to sustainability performance targets – could be a better option for governments to consider as they have a “strong incentive” for issuing companies to embrace more sustainable practices.

“That incentive comes in the form of a ‘penalty’ feature – such as coupon step-ups or an additional payment to investors at maturity – that kicks in whenever performance targets are not met,” they explained.

Although some investment professionals fear there are some creases to be ironed out when it comes to the issuance of green bonds, the reception from the industry has been broadly very positive.

Dzmitry Lipski, head of funds research at interactive investor, called the issuance of green gilts “long overdue”, while AXA Investment Managers’ Julien Foll said the UK’s decision to launch green sovereigns “sends a clear and positive signal about the future direction the country is taking”.

Thomas Archer, Nikko Asset Management’s green bond product specialist, said it marks a “major step forward for the UK in its aspiration to be a leader in green finance” and will “further the UK’s reach in funding other projects with positive climate benefits”.

Source Investment Week

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