Come on UK, get with the programme
The UK is in many ways a green leader. Starting to issue green Gilts would be peripheral to that, and not necessary to environmental progress. But for a country that desperately needs to buff up its image, it is low-hanging fruit.
Supporters of the UK issuing green Gilts are making a new push. Gareth Davies, who has been an MP since December, having previously worked in responsible investment at Columbia Threadneedle, organised a webinar on Tuesday to make the case for it.
It was held under the Chatham House rule, but speakers included representatives of two very experienced green and social bond issuers, a UK policy adviser and a government minister.
The meeting was held by the All-Party Parliamentary Group on Sustainable Finance, launched in January, of which Davies is a vice-chair. Ed Miliband, the former Labour leader, is another. The chair is Sir Edward Davey, former secretary of state for energy and climate change.
The webinar appeared designed principally to gather support for the idea among MPs and in the media.
The Treasury — the vital ministry whose backing would be needed — did not speak, though it very likely sent a representative to listen.
The issue has officially been on the government’s policy radar since March 2018, when its Green Finance Taskforce produced a far-reaching set of recommendations for greening the UK’s financial system, including issuing a green Gilt comparable in size to France’s, then €10bn.
The government has not yet said it will issue. The chaos and infighting caused by Brexit are likely to have been the major obstacle; this year, the coronavirus has given ministers plenty to do.
“The government has been carefully considering issuance of UK sovereign green bonds,” said one of the speakers. “At present it doesn’t plan to, but the door is open, provided certain key conditions can be satisfied.”
The first was that it had to provide value for money, he said; second, there had to be “sustained and strong demand in the long term”; and third, it had to be “consistent with the government’s wider fiscal objectives”.
The hour’s discussion was mainly arguments why those conditions had been met. One speaker quoted an estimate that there were just under $1tr of green bonds outstanding, but about $2tr to $4tr of demand for them, based on money allocated to green fixed income.
The issuers emphasised how deep and broad demand was for their green and social bonds, and that it was particularly strong from asset managers, pension funds and insurance companies in the US, Europe and the UK.
They lauded the success achieved by other sovereign issuers, from France to Fiji.
The extra costs of issuing — such as transaction reporting — had fallen and were “negligible compared with the benefits”, speakers argued. One said they mattered less now, anyway, since investors required environmental, social and governance (ESG) information when buying any bond, green or not.
Another quoted a Climate Bonds Initiative survey of treasurers at green bond issuers, in which 98% said their green bonds had attracted new investors and 91% had gained more engagement with bondholders.
The panel did a good job of painting green bonds as a big, well established and successful market, and of explaining them to a lay audience.
One questioner from the audience — another MP with a City background — said he had found it “super helpful” and “a very exciting initiative”.
They also made a strong case for now being a good time to issue. “I can’t think of a better time and place for the UK to lead this charge,” said one panellist. “We are the leading financial centre in the world — we could build upon our natural competitive advantage, and the single best one is that we bravely passed a net zero carbon law.”
Another put the UK’s initiatives into a timeline: the legal commitment to net zero greenhouse gas emissions by 2050 in June 2019; in July the Green Finance Strategy; in October implementation of rules requiring pension fund trustees to take ESG issues into account.
Coming up is the Pension Schemes Bill, which will give the government powers to compel funds to report according to the recommendations of the Task Force on Climate-Related Financial Disclosures.
The UK being due to co-host the COP 26 negotiations — which had been scheduled for November in Glasgow but have been postponed because of coronavirus — made it particularly opportune to issue now, speakers argued.
So the tests can be satisfied, the time is opportune — what was missing was a comprehensive case for why the UK should issue green bonds.
The invitation to the event said: “To fuel our economic recovery from Covid-19, the UK government must look to issue a government green bond to drive investment into low carbon projects that would boost UK growth, jobs and productivity. A new government green bond would help make the UK the green finance capital of the world while cementing the UK as a global leader in climate action.”
But in the webinar the question of what expenditure the government could finance was not touched on; nor was why financing this with green bonds would be preferable to normal forms of funding, nor how it would “drive investment into low carbon projects”.
When GlobalCapital asked Davies after the session what government spending he envisaged green Gilts would finance, he referred to an answer given on the call to a different question — how much the government could issue — and did not answer a follow-up question.
Some of those involved in the debate appear stuck in the naïve view that green bonds are “a way to raise funding” for green activities. They also seemed to confuse green bonds with the government seeking “private investment” for green infrastructure.
The old chestnut of government green bonds being “benchmarks” that would help the private sector issue was also handed round.
No magic money tree
This confusion may be understandable when the vital actors — the chancellor of the exchequer Rishi Sunak and prime minister Boris Johnson — are absent from the debate.
But time and hot air will be saved if participants grasp what green bonds do and what they don’t.
For creditworthy entities such as the UK government, they do not solve any funding problem, or make it more possible to do green projects, or more likely that green projects will occur. They do not unlock a new pot of money that can change the issuer’s budgets or strategy or financial planning.
Investment grade governments — just like investment grade companies — have access to debt already. If they have green investments to make, they can make them, whether or not they can issue green bonds.
Green bonds can allow the issuer to reach new investors and to price debt more cheaply than its normal debt. This is not because green bonds are of better credit quality than ordinary bonds, but simply because investors desire to make green investments, and will pay up for this. Green bonds offer extra, non-financial, value to the investor, for no extra effort or risk.
However, with very few exceptions, this funding cost advantage is not big enough to improve the economic viability of the underlying green project — usually a capital investment planned years in advance, the margin of error for which will be measured in percentage rather than basis points.
The few basis points saved by funding with a green bond are within the range of fluctuations that occur all the time in bond pricing, as market conditions change from day to day. They are real, and worth having, but not bankable.
Since green bonds are debt, they will need to be repaid. Therefore issuing them has the same financial effect for the issuer as issuing ordinary debt: they add to gearing.
For the UK, finding institutions willing to lend it the money is not a constraint on what green projects it can engage in. The obstacles are finding and planning the projects; and having enough tax revenue to repay the debt.
Government bonds are very liquid and tightly priced, so the value for money considerations are substantially more difficult and evenly balanced for them than for all other borrowers — even supranational banks.
Germany and Denmark have worried a lot about this issue; each has come up with an innovative method it believes will neutralise any cost drag from impairing the liquidity of their conventional bond curves.
The UK, much more highly indebted, need have fewer qualms. It would certainly make sense to make a green Gilt big, to minimise liquidity concerns, but demand would be high and there is no cause to worry overmuch about the new issue’s liquidity.
Selling the story
The main point of labelling bonds green is marketing and communications. Some UK government spending is green; telling investors this in a very clear way is likely to increase their demand for UK debt, especially for instruments that allow them to claim they have specifically financed those green activities.
Green bonds also have wider communication benefits, which are harder to quantify, but issuers have attested to them. They raise the public image of the issuer as green and awareness of its green plans, even beyond the capital markets; and they often energise the organisation internally, engaging staff in the cause of sustainability who had not previously been involved in it.
Since these include finance staff, the effort helps to educate those who will have the much more serious and difficult task of answering questions about the sustainability of the whole organisation, as general investors start to wake from their slumber and probe that.
Whether these communication benefits are worth the hassle and potential small costs of issuing green bonds is open to debate.
It seems clear that for private sector and probably supranational and agency issuers, they are worth it. For governments, the case is not proven yet.
However, issuers should not wait for a definitive, quantitative answer. That is missing the point. Governments do many other things — holding parades and festivals, hosting sporting competitions and COP summits, buying Premier League football clubs — whose full benefits are not measured in dollars and cents, but in the message they send to the world and the image they project.
Green bonds are like that. France, Belgium, the Netherlands, Ireland, and soon Germany, Denmark and Sweden and likely some southern European countries have all issued green bonds. The UK is beginning to look like a stick-in-the-mud for not issuing them.
It would be one thing if the UK had a serious, reasoned objection — such as that they were unnecessary and it could communicate its green message in other ways. But it hasn’t.
The government’s tests are easily satisfied — it simply hasn’t got round to issuing. It is surprising, considering that it has done far more difficult, ambitious and important things, such as legislating a zero emissions target for 2050.
Green bonds are not changing the world, or making any green projects happen that were not happening anyway. But they are helping to raise green consciousness in the financial markets and to market issuers’ green activities.
For that reason they have become a $1tr market that shows no signs of slowing down.
And this should be the clincher for the UK. Financial and professional services are the UK’s strongest industry. The future for these services is green. Environmental and social considerations will soon touch every financial decision.
The UK has to maintain its leadership in financial services — severely challenged by Brexit. So it is vital that it retains the unique pool of international talent it hosts at the moment — and remains the place where finance people sense the greatest opportunity.
For that, the UK must not only be at the cutting edge of green finance; it must be seen to be there.
For Sunak and Johnson, this is a no-brainer.