Green retail bonds make sense, if not economic sense
GlobalCapital, is part of the Delinian Group, DELINIAN (GLOBALCAPITAL) LIMITED, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 15236213
Copyright © DELINIAN (GLOBALCAPITAL) LIMITED and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement
People and MarketsCommentGC View

Green retail bonds make sense, if not economic sense

UK_Countryside_Alamy_2Mar21_575

The UK’s plan to launch the world’s first sovereign green bonds for retail investors is a welcome addition to the suite of sustainable fixed income products. It might be costly for the Treasury compared to what it can raise in the Gilt market but there are plenty of reasons why it is a good idea.

As yet, there is little detail on the structure of the proposed instrument or the amount the government will target to raise. 

What we do know is that green retail bonds will be tied to the UK’s green bond framework, with projects evaluated and selected in line with the International Capital Market Association’s Green Bond Principles.

This should remove concerns of greenwashing. The bonds will be used to fund projects in areas such as renewable energy and clean transportation.

As a result, UK retail investors can be confident putting their money into the debt knowing they are contributing towards the country’s transition to net zero carbon emissions by 2050.

That is the big plus for this product — allowing everyday people the opportunity to finance projects that will directly affect all their lives and their environment. Decarbonising the economy is a collective effort and so there is no reason why the investment and financing of it should not be either.

Another plus is that the bonds will offer everyday savers an attractive investment option in the era of ultra-low interest rates. Getting a decent return on your savings and helping tackle climate change at the same — what’s there not to like?

But herein also lies the obvious economic disadvantage to retail government bonds in that the soveriegn will likely almost certainly have to pay above the market rate for the debt. That, by definition, makes them an inefficient tool for raising capital and has not green bonds' big selling point been that they save borrowers money compared to conventional debt?

But the fact is that the overall proportion of the UK government’s funding via retail will be miniscule and the advantages surely outweigh the penny pinching argument.

Green retail bonds are a novel idea that could be emulated by other sovereigns in helping to raise the profile of a government’s green agenda, particularly with the general public.

The UK and other sovereigns could base the structure of the bonds on Italy’s BTP Futura programme — the country's first 100% retail government bond — where retail investors who hold onto the bonds until maturity are rewarded with a step-up coupon structure and a loyalty bonus.

The UK has been a leader in so many areas of finance. Involving the country's population in working towards a greener environment would be a logical and commendable next step. 

Gift this article