The government is to press ahead with “at least two” green gilt issuances later this year totalling around £15bn, and on Wednesday published its Green Financing Framework setting out its climate and environmental agenda in more detail.
The announcement and the framework’s publication, the latter of which details how proceeds from the green gilts and retail green savings bonds will be spent, has vindicated those experts in the pensions industry who have long called on the government to make it easier for pension schemes to invest in climate-aware ways.
Green gilts issued by the UK government will be particularly appealing for funded defined benefit pension schemes as they are lower risk when compared with investing directly in green energy projects
Nigel Peaple, PLSA
Plans for a sovereign green bond, or green gilt, were announced in November last year. They are a form of government borrowing designed specifically to finance “projects with clearly defined environmental benefits”, according to a Treasury policy paper.
In addition to the two issuances planned for this year, the government will issue green savings bonds via the National Savings & Investments Bank. These are standalone retail bonds tied to a sovereign green bond, and the government will “report on social co-benefits of expenditures financed by the green gilts and retail green savings bonds, such as job creation, access to affordable infrastructure and socioeconomic advancement”, the Treasury said.
The Green Financing Framework details how the proceeds from the green gilt and retail green savings bonds will finance expenditures to help tackle climate change, biodiversity loss, and other environmental challenges, while creating green jobs across the UK.
It lists six types of “green expenditures” to be financed by the green gilt and green savings bond: clean transportation, renewable energy, energy efficiency, pollution prevention and control, living and natural resources, and climate change adaptation.
The framework “commits the government to annual allocation reporting and biennial reporting on environmental impacts and social co-benefits, ensuring transparency for retail and institutional investors and other interested parties”, the Treasury said.
The first green gilt is to be issued in September this year, according to the Debt Management Office.
Green gilts a pathway to ‘more ambitious’ projects
Industry reaction to the announcement was broadly positive, with Nigel Peaple, director of policy and advocacy at the Pensions and Lifetime Savings Association, welcoming the introduction of green gilts.
“We called on the government to make it easier for pension funds to invest in a climate-aware way and, in particular, we asked them to introduce a green gilt,” he said.
“With new rules for climate disclosure coming into force for large pension schemes from 2021, pension fund trustees need a broader array of investments to meet their climate ambitions. Green gilts issued by the UK government will be particularly appealing for funded defined benefit pension schemes as they are lower risk when compared with investing directly in green energy projects.”
Peaple continued: “We also support the proposals to ensure climate change considerations are factored in across the investment chain, in particular the development of UK Sustainable Disclosure Requirements on companies, and that the government will use COP26 to achieve global standards.”
Cardano chief executive Kerrin Rosenberg was similarly positive, branding the introduction of green gilts “a significant step forward for climate financing both in terms of its scale and accessibility”.
“The issuance is a positive sign that the government intends to follow through on its climate commitments and show global leadership ahead of COP26. With the finance raised from this issuance, the government will be able to channel funding to the projects that are essential in decarbonising our energy system.”
He added that the gilts should help meet “the increasing demand for green investing”, while also establishing “a pathway to funding more ambitious environmental projects”.
“While green bonds typically carry a lower yield than conventional bonds, we believe this underestimates the forward-looking returns of these products. In our view, demand for green gilts will increase further, causing outsized price appreciation,” Rosenberg said.
“Green gilts could also potentially offer a better risk-reward trade, as the volatility of the bonds may be lower in the future than their conventional equivalent due to the holding pattern of investors in green compared with traditional bonds.”
Legal loopholes?
Though the launch has been well received, the Green Financing Framework does acknowledge problems with the definition of green and sustainable investments — the problem being that there is no clear definition.
“There is currently no clear definition (legal, regulatory or otherwise) of, nor clear market consensus as to what constitutes, a ‘green’ or ‘sustainable’ or equivalently labelled project, or as to what precise attributes are required for a particular project to be defined as ‘green’ or ‘sustainable’ or such other equivalent label,” the framework states.
“Nor can any assurance be given that a clear definition or consensus will develop over time, nor if a definition or consensus develops, that it will not change over time. Accordingly, no assurance is given that the eligible green expenditures will satisfy any present or future investment criteria or guidelines with which an investor is required, or intends, to comply.”
It further adds that no assurance can be given that “eligible green expenditures” will “meet investor expectations or requirements regarding such green, sustainable, social or similarly labelled performance objectives”, including the EU taxonomy.
Further, though the Treasury’s intention is “to apply an amount equivalent to the proceeds of any green financing to eligible green expenditures and to report on the eligible green expenditures as described herein”, the framework states that there is “no contractual obligation to do so”.
“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,” it states.
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This means the Treasury can give no assurance that any projects “will be completed as expected”, that the “stated aims and/or impacts of any projects… will be met or made, nor that adverse environmental, social and/or other impacts will not occur during the implementation of any projects or uses the subject of, or related to, any eligible green expenditures”.
Additionally, its failure to allocate the proceeds of green gilts or green savings bonds to eligible green investments, or to report in line with the requirements laid out in the framework, or a failure of green gilts or the green savings bonds “to meet investor requirements” will “constitute an event of default or breach of contract”, it states.
