A green gilt revolution?
For financial professionals only
Renewable energy accounts for around 40%(1) of the UK’s energy use. Indeed, we were one of the first nations that committed to reduce carbon emissions by 78% by 2035(2) and achieve net zero by 2050. We’re amongst the leaders of the developed economies in aiming to transition to a green, sustainable economy, and achieve these ambitious targets. But to do this, significant changes will be needed in our economy.
As part of this, the UK Government outlined its Ten Point Plan for a Green Industrial Revolution in November 2020. This aims to create new jobs and invest in existing and new industries, to tackle climate change and transition to a more sustainable future.
But how will this be financed?
As the Ten Point Plan was announced, Chancellor Rishi Sunak said the UK would issue its first ‘green’ gilt in 2021- a UK sovereign bond whose proceeds will be solely ringfenced to finance these initiatives. This was launched on 21st September, with a yield of 0.875% and maturity date of July 2033. The £10bn raised is the largest sovereign green bond on record, and the £100bn of demand was also a record for a UK government bond sale(3). This higher demand resulted in a higher price (and lower yield) for the bond relative to an equivalent conventional gilt, or what has been termed a ‘greenium’. In addition to the green gilts, retail investors will also be able to participate in financing sustainable projects via the NS&I’s Green Savings Bonds, planned to launch later this year.
The gilt proceeds will be assigned solely for projects which align with activities set out by the UK Taxonomy. This includes renewable energy, clean transportation, energy efficiency, pollution prevention and control, living and natural resources, as well as climate change adaption (the necessity of which can be seen from recent flooding and wildfires across various countries).
Will it be enough?
Despite being a leader, the UK is still behind other European countries. Several of these have now issued green sovereign debt, with France the leading issuer, as well as a variety of nations across Africa, Asia and Latin America. Additionally, the £15bn earmarked by the UK for issuance in 2021-22 is relatively small compared to the amount needed over the coming years and decades to achieve the targets in the government’s plans. PwC estimate £40bn a year will be needed by 2030 alone to meet the net zero target(4).
Although there’s lots more work to do and more government support needed, it’s still a step in the right direction. With increased focus on ethical and ESG investing, the issuance of government debt for sustainable economic activities will be a necessary boost to complement what’s already being done in the private sector, and an interesting space for ethical investors. Green gilts may feature in fixed interest portfolios over time, and we’ll look to quiz our fund managers about their prospects and outlook across all our solutions.
(1) Energy Trends UK: April to June 2021 , Department for Business, Energy & Industrial Strategy (30/09/2021) (https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/997347/Energy_Trends_June_2021.pdf)
(2)UK enshrines to target in law to slash emissions by 78% by 2035, Gov.uk (20/04/2021) (https://www.gov.uk/government/news/uk-enshrines-new-target-in-law-to-slash-emissions-by-78-by-2035)
(3)UK’s debut ‘green gilt’ sale draws blockbuster demand, FT.com (21/09/2021) (https://www.ft.com/content/94d604a9-50b9-49f1-b377-a7b6e4083d01)
(4)£400bn additional infrastructure spend needed to meet Net Zero target. PWC (18/11/2020) https://www.pwc.co.uk/press-room/press-releases/p400bn-additional-infrastructure-spend-needed-to-meet-net-zero-t.html
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