After new details about UK’s first sovereign green bonds were received positively by the pensions industry, the excitement seems to be dissipating, since the summer 2021 launch date will be missed and scepticism remains about the motives and effectiveness of the scheme.
In a recent Pensions Expert Twitter poll, 51 percent of respondents said the government’s green bond ambitions constituted greenwashing. Clearly, some people think something is amiss.
Questions being raised range from the projects to be funded and how green they are really are, to the legal structure and the interest rates to be offered.
Another criticism made is that £15bn in bonds is a drop in the ocean, compared with the real need for green finance nationwide or the green bond demand from pension funds and other investors.
This is a new market and there will naturally be a bit of a teething process while investors, including pension funds, get comfortable with the asset class
Joe Drabowski, PLSA
Indeed, 10 per cent of those in the Pensions Expert Twitter poll warned it would become “a crowded trade”.
In response to the poll, pensions minister Guy Opperman tweeted that the sovereign green bond is a “massive step forward on so many levels! Long called for by the pension schemes and investors and the first of many.”
He explained his reasoning in a subsequent thread, noting the role of pension funds in helping the UK reach the target of net-zero carbon emissions by 2050.
“As pensions minister, I have visited solar farms, hydrogen factories and so much more. Engaging and cajoling key stakeholders is vital to achieving net zero.”
On June 30, the Treasury gave additional details on the reporting associated with the bonds, which will cover both environmental and social impacts, and include input from VE, part of Moody’s ESG Solutions, and the Carbon Trust.
The current plan is for at least two issues of green gilts in 2021, adding up to at least £15bn, plus a retail green savings bond to be issued by NS&I.
Nevertheless, some suspect greenwashing — disinformation disseminated by an organisation to falsely present an environmentally responsible public image.
A question of trust
It is important to realise that greenwashing is not tangible. Instead it is an emotive response investors feel about the validity, reliability, and trustworthiness of a green opportunity.
Pension schemes will invariably assess the credentials of any bond offering, as driven by their risk management and investment process, but greenwashing, in various forms, is apparent across the industry.
These range from the palest, most transparent forms of greenwashing that investors can see right through, all the way up to the murkiest forms, where an investment’s impact is obscured through the complexities of supply chains, incomplete environmental reporting, and murky dealings.
There also is a risk that the loopholes caused by inexact definitions will result in savers’ money being used in ways they may not anticipate.
“There can be no assurance that any such eligible green expenditures will be available or capable of being implemented in the manner anticipated and, accordingly, that HM Treasury will be able to use the proceeds for such eligible green expenditures as intended,” the government’s Green Financing Framework stated.
Such a significant product launch will inevitably have complications, says Joe Dabrowski, deputy director of policy at the Pensions and Lifetime Savings Association.
“This is a new market and there will naturally be a bit of a teething process while investors, including pension funds, get comfortable with the asset class.
“There might be some scepticism about how the proceeds of green gilt issuance will be used, but until we see the first issuance this is still only in the realm of speculation,” he says.
Assurances, such as the government committing to the Green Bond Principles, a framework that outlines best practices when issuing bonds serving social and environmental purposes, may go some way in settling apprehensions.
Likewise, a newly announced Whitehall-led initiative oversees the government’s delivery of a 'Green Taxonomy' – a framework intended to benchmark whether investments can be described as environmentally sustainable.
The Green Technical Advisory Group will help clamp down on greenwashing, the Treasury says, and will have 18 members from across the business, data, and environmental sectors.
Consistent, clear and accessible data need to be provided, and although it is not a complete cure for greenwashing it is certainly a strong start.
Green data in black and white
The corporate world has embraced green bonds rapidly, with the sector reaching a level of maturity that many would not have anticipated.
Industry welcomes govt’s new green gilts
The government is to press ahead with “at least two” green gilt issuances later this year, totalling around £15bn, and has published its Green Financing Framework setting out its climate and environmental agenda in more detail.
In 2020, the global issuance of green bonds totalled £165bn as the private sector and some governments looked to investors to finance sustainable initiatives, the Climate Bonds Initiative reported. In comparison, the value of green bond issuance at the end of 2015 was just £29bn.
Convincing investors that the environmental outcomes will live up to expectations is a key challenge.
Things are moving in the right direction, with improved regulations and mandatory reporting becoming the norm, but the messaging from the government has, so far, not fully connected with the industry.
