The UK government is to issue its first green sovereign bond in 2021 which will coincide with the country hosting the delayed UN Climate Change Conference of the Parties (COP26). The move is not only to cement its position on the sustainable landscape but also to carve out an area of potential growth in financial services in the post Brexit landscape.
Analysts expect to see the first issue in the first half of 2021, after the work has been completed to identify expenditure targets and establish monitoring and impact reporting.
Last month, a group of 30 major investors with more than £10trn of assets under management collectively urged the Treasury to issue a green bond as soon as possible, in line with the recommendations of the Green Finance Institute.
Other countries such as Germany, France, Sweden and Poland have already entered the fray with funds raised typically deployed to finance low-carbon infrastructure projects.
The view is that the UK will follow a similar approach to Germany’s green bund programme which offer different maturities to establish a green yield curve compared to the French who opted for the more conventional route of issuing a series of green Obligations assimilables du Trésor (OAT) at the same maturity.
The UK seems unlikely, though, to mimic Germany’s twin-bond model of issuing matching green and conventional bonds with identical coupons and maturities.
As with other sustainable investments, there are concerns of greenwashing due to a lack of accuracy and accountability of corporate issuers.
While there is no standard definitions or standards, there are currently several voluntary standards such as the Green Bond Principles (GBP) issued by the International Capital Markets Association (ICMA) and introduced in 2014.
“The taxonomy of what is “green” is still being clarified and acts as a natural speed limit,” says Andreas Billmeier, sovereign research analyst at Western Asset Management.
He adds that there is also a question of shifting borrowing from “standard” bonds to green bonds without affecting market liquidity negatively. In that sense, a period of high issuance is a good window of opportunity to build an additional yield curve and time is of the essence.
“It will be important to see to what extent issuers around the world (including the UK) will want to manage the green curve relative to the traditional curve to avoid market distortions in the transition,” he says.
Billmeier also notes that some sovereign issuers have actively committed to minimising any spread between the two.
“That said, we still observe minor differences in yield where corresponding green and brown bonds have been issued – a scarcity premium,” he says. “In other words – we don’t necessarily expect this scarcity premium to arise, but it is too early to tell in the case of the UK.”