At last month’s G7 summit in Biarritz, UK prime minister Boris Johnson pledged funding to tackle deforestation in the Amazon. But when it comes to green bonds — whose proceeds would be used to help tackle climate change at home — Britain is standing against the current, resisting calls from investors to join the ranks of sovereign issuers.
Global issuance of green bonds, which raise funds for specific environmental projects, reached a record $117bn in the first half of 2019, according to data from rating agency Moody’s. That total was up almost half compared with the same period last year.
In May, the Netherlands became the sixth European country to sell green bonds, and Germany and Sweden plan to join the club by next year. But the UK is yet to follow suit, despite declaring a climate emergency and becoming the first big economy to put into law a net zero carbon emission target for 2050.
In the July announcement of its green finance strategy, the British government said it did not plan to issue a sovereign green bond, citing the greater value for money of its mature market in standard gilts. The paper also noted the “absence of significant barriers” to corporate issuance.
“One of the best environmental policy signals the [UK] government could give is to issue a green sovereign bond,” said Trevor Allen, sustainability research analyst at BNP Paribas, adding: “It’s great to have those ambitions, but when we’re 30 years away, it’s easy to kick that can down the road.”
In May asset managers, including the £350bn investment group Columbia Threadneedle, wrote a letter to the government urging them to issue green gilts, reporting “significant appetite”. Unlike standard government bonds, whose proceeds are pooled and spent on public services, money raised from green bonds is used to finance particular environmental projects.
For example, the €7bn raised from France’s inaugural green bond in 2017 was spent on activities including sustainable forest management and waterway maintenance. “Green bonds’ use of proceeds have to be fairly prescriptive,” said Mr Allen.
Since the market’s inception, the volume of euro and dollar-denominated green bonds have vastly overshadowed sterling-denominated equivalents. In the first six months of 2019, €65bn worth of green bonds were sold compared with £2bn, according to the Climate Bonds Initiative.
“There is definitely a gap between the UK and other countries in Europe,” said Noemie de la Gorce, credit analyst at S&P Global Ratings. “In some countries the fact that there was sovereign issuance pushed issuers to issue green,” she said, adding that issuers have also seen greater investor diversification and reputational advantages.
Investors have bemoaned the dearth of sterling-denominated green assets, blaming the UK government’s lack of activity, as well as broader pricing concerns and issuers’ reluctance to pay the administrative costs of reporting environmental impact.
“The demand on the investor side is definitely greater than what we’ve seen on the issuance side,” said Farnam Bidgoli, head of Emea sustainable bonds at HSBC.
The question of whether green bonds should fetch a premium has put some issuers off coming to market. In July, the world’s largest pension fund, Japan’s Government Pension Investment Fund, warned that the asset class risked becoming “a passing fad” unless the market could decide whether a so-called “greenium” should exist.
But investors say their fiduciary duty to clients means a premium cannot be justified. If the UK government chooses to issue a green gilt with a premium, an act of parliament may be required to enable it.
Ms Bidgoli said that at the outset, “there was a sense of scepticism because issuers were focused on the fact that green bonds had no demonstrable pricing advantage”, but that companies did go on to follow the lead of governments that issued green bonds.
Mark Byrne, syndicate director at investment bank TD Securities, said issuers simply focused on continental European markets where investors were more vocal in their support for green bonds. “European investors are more sophisticated in their understanding [of the asset class],” he added.
Source Financial Times