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Sterling SRI bond market roars into life

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By Burhan Khadbai
13 Dec 2019

Sterling is set to take a bigger slice of the socially responsible bond market as a result of a number of initiatives, including reforms that are putting the pressure on UK pension funds to focus on environmental, social or governance (ESG) factors in their investments. Burhan Khadbai reports

UK pension funds are scrambling to put cash into sterling socially responsible bonds and public sector borrowers are taking full advantage of the rush.

“There’s definitely growing attention on the sterling green bond market,” says Aldo Romani, head of sustainability funding at the EIB in Luxembourg. “We are very happy that UK market participants are moving in this direction.”

Since October, the UK’s Department for Work and Pensions has required UK pension schemes with 100 or more members to produce a Statement of Investment Principles (SIP) to set out how they take account of ESG considerations. UK pensions minister Guy Opperman wrote in a letter to the UK’s biggest funds in October: “Pension funds are a powerful weapon in the fight against climate change. Despite some good work by a number of schemes, some are not acting. We need urgency on this vital issue from trustees and investment managers.Review2019

“I’m demanding that the remaining pension schemes and the fund managers they appoint stop shuffling their feet and meet their responsibilities to savers now and in the future, and the future of the planet.”

Before the reforms came into effect, KfW and the European Investment Bank sold record deals in the sterling socially responsible bond market, which benefited from strong demand by UK pension funds. 

In July, KfW issued a $650m seven year green bond, the biggest ever SRI bond by a sovereign, supranational and agency until the EIB followed the week after with a £800m five year Climate Awareness Bond (CAB).

EIB’s bond became the largest single tranche sterling SRI bond across any sector. Danish energy company Ørsted issued a £900m green bond in May, but that was across three tranches.

“The transaction was driven by market demand,” says EIB’s Romani. “We initially had plans to launch the transaction at the end of the year but it came earlier than we planned because we were receiving strong indications that this deal would be met with good interest. We had a size of £500m in mind, but with an order book of over £1.4bn, we gave in to the demand and printed £800m.”

In addition to the UK pension fund reforms, other initiatives that are driving interest into the sterling green bond market are the UK’s Green Finance Strategy and the UK’s Green Finance Institute, which the government launched in July. 

EIB’s five year CAB was its second ever sterling SRI bond, following its debut in March 2014. But it may not be long before the EIB taps the sterling market again for an SRI bond.

“We will definitely look at issuing another sterling CAB next year,” says Romani. “We could also consider the sterling market for our sustainable awareness bond issuance.”


Green Gilts?

There is also growing interest for the UK sovereign to issue green bonds. In 2019, large asset managers urged the UK Debt Management Office (DMO) to begin issuing green bonds to support the country’s environmental initiatives and to broaden the range of assets they can buy.Review2019

“The UK government has committed to reach a net zero carbon emissions target by 2050,” says Joshua Kendall, senior ESG analyst at Insight Investment in London. “This is only achievable by investing in renewable energy and energy efficient infrastructure. It’s going to need hundreds of billions of pounds of investment. The only way the UK is going to achieve this is through a massive increase in public spending and the issuance of Green Gilts would be a transparent way to do this.”

The UK government’s Green Finance Taskforce has also proposed the idea of a sovereign green bond. 

But the prospect seems far away — at least for now. 

“At present the government does not plan to issue a sovereign green bond, given the absence of significant barriers to market for corporate issuances in the UK,” says a spokesperson at the UK DMO. “In addition, the government does not consider a sovereign green bond to be value for money compared to the core Gilt programme, which remains the most stable and cost-effective way of raising finance to fund day-to-day government activities including existing and new green expenditure.”GC

By Burhan Khadbai
13 Dec 2019