No one can accuse UK chancellor Rishi Sunak of going out on a limb by pledging to sell the UK’s first green gilt next year. Nearly four years have passed since Poland won the race to sell the first sovereign green bond, with a host of others in Europe and emerging markets following in its wake.
Investors hungrily gobbled up Germany’s inaugural green Bund in September. And with Joe Biden set to bring his climate agenda to the White House next year, some investors are speculating that the US could soon join the party.
The arrival of green gilts follows a sustained campaign by some of the UK’s biggest fund managers, who have money piling up in strategies for investing for better environmental, social and corporate governance.
However, popularity alone does not a good idea make. On the face of it, green bonds are a simple concept, with the proceeds raised from them earmarked for environmental spending such as green energy or public transport projects.
But, particularly in the case of governments, the link between green issuance and any additional green spending is tenuous at best. Germany, for example, identified €12.7bn of eligible spending from last year’s budget — hardly an indication that the green Bund programme will be financing anything that was not already happening anyway.
Investors are hoping for more details on the green gilt plan when Mr Sunak presents the government’s spending review on Wednesday. Unless the bonds are structured in a way that clearly ringfences the proceeds for environmentally friendly activities, they could be an exercise in state-sponsored “greenwashing”, according to Ashley Hamilton Claxton, head of responsible investment at Royal London Asset Management.
Royal London is also keen that the repayments of green bonds are financed by the green projects themselves, not by less climate-friendly activities. Such an arrangement would run counter to orthodoxy at the Treasury, which has long resisted so-called “hypothecation” of the proceeds of taxes or debt for specific purposes.
Using a separate vehicle to issue green debt (and repay it with the money from green projects) would most likely mean higher borrowing costs — much as bonds issued by state-backed Network Rail trade at significantly higher yields than their counterparts in the gilt market. In any case, formal hypothecation seems very unlikely.
Most investors expect the money raised from green gilts to head straight into the government’s central accounts, as it does in other countries that have issued green bonds. That is why Sir Robert Stheeman, the head of the UK Debt Management Office, reiterated to MPs in June that the significance of green issuance would be “symbolic”.
Ultimately, sovereign bond issuance either refinances old borrowing or is simply the difference between what a government spends and what it takes in taxes. Re-labelling a portion of bond sales as “green” does nothing to change that. But could green bonds offer a cheaper source of funding for governments looking to transform their economies in the face of climate change?
Existing sovereign green debt trades more or less in line with normal bonds, or even at a slightly lower yield. Much was made of the fact that Germany issued €6.5bn of green debt at a yield one-hundredth of 1 per cent below that on an ordinary Bund, such was the scale of demand.
But a saving of €6.5m over the life of the 10-year bond is a drop in the ocean that will do little to incentivise extra environmental spending. With bond yields around the world close to lows, finance is not a meaningful constraint on governments’ green ambitions. Nor is a more substantial “greenium” likely to open up in markets. If it does, investors will simply arbitrage away the difference.
So how much is the symbolism of green sovereign bonds worth? Arguably, they are a harmless innovation that allows investors to feel good about the use of their savings.
But we should be wary of embracing a form of ESG investment that puts tokenism ahead of real impact — and one that could divert funds away from green bond issuers that are genuinely looking to fund something new.
“People say it’s not going to hurt, so why not?” said Mark Dowding, chief investment officer at BlueBay Asset Management. “But what bothers me is there are end investors out there who really care about investing in things that truly make a difference. They are being sold short.”
Source Financial Times