Green Gilts and what they mean for the UK’s Green Economy

Chancellor of the Exchequer Rishi Sunak made an announcement at the Green Horizon Summit on 9 November, confirming that the UK will be issuing its first sovereign green bonds in 2021, alongside new climate disclosure requirements for premium listed companies.

Green bonds: what are they?

What is the difference between traditional gilts and green sovereign bonds? Traditional bonds are usually issued by the government as a means of raising funds and generating income. In essence, green bonds will do much the same thing: the purchaser buys the bond with a promise from the seller (the government, in this case), that the amount will be repaid at a certain point in the future, during which it will generate interest for the buyer. However, the funds from the green gilts, which will be issued in 2021, must finance projects that will contribute to reducing carbon emissions. The government has essentially pledged that the proceeds from the issuance will be used for an environmentally friendly purpose, like renewable energy or clean energy projects.

According to the Financial Times, the idea here is to encourage the allocation of capital that will help the transition to a less carbon-intensive economy whilst also satisfying growing investor demand for environmentally and morally conscious financial instruments. That being said, the issuance will likely have more of a symbolic effect on the UK’s green finance market which is currently still in its infancy. However, if the UK Government’s goal to position itself as a world-leading green finance hub is anything to go by, it looks as if the market for green finance will only grow in size and value. Investor sentiment here offers a parallel perspective. According to Saxo Bank fixed income strategist Althea Spinozzi, investors are interested not only because the green gilts will tick the ESG box, but also because they believe that demand for them will be sustained, making them a valuable mid- to long-term asset.

The Chancellor of the Exchequer’s announcement comes amidst hopes of a Green Recovery from the COVID-19 pandemic. Andrew Bailey stipulates that the UK’s goal is to “build a financial system resilient to the risks from climate change and supportive of the transition to a net-zero economy”, which is illustrative of the entanglement of environmental goals and the economic recovery as the UK continues to fight its way through the pandemic.

The TCFD mandate

Another interesting element of Sunak’s November 9th announcement was the new disclosure requirements that are in line with recommendations from the Taskforce on Climate-related Financial Disclosures. The rules will require premium listed companies to make more transparent disclosures about how climate change affects their business. A significant portion of the UK’s finance industry will be affected by these new requirements, including major pension schemes, life insurance providers and asset managers. This development is in line with the UK’s intentions as set out in its Green Finance Strategy in 2019.

Industry Response

The industry appeared to broadly but cautiously welcome the changes. An updated TCFD status report indicated that verbal commitments to support their recommendations have increased by a whopping 85% over the past year, making it clear that a large number of businesses are preparing to adjust and support the transition to a greener economy. The heightened level of reporting will increase the volume of data available for measuring and managing environmental issues, so it would seem that at least a significant number of UK organisations feel that this is a step in the right direction.

On an international level, the UK is the first G20 government to have mandated TCFD-aligned disclosures, which sends a powerful signal to the market that the UK means business when it comes to the green economy. In light of Boris Johnson’s announcement of his Ten Point Plan for a Green Industrial Revolution, it is clear that support for a greening of the UK’s economy and finance industry is firmly on the agenda. Let’s hope that it comes to fruition!

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