As the British government begins to plan and implement steps to kickstart and revive the economy from the impacts of Covid-19, conversations surrounding a green recovery have deepened. And so, with the help of the APPG on Sustainable Finance and Seahorse, Gareth Davies MP (APPG vice chair and former head of responsible investment at Columbia Threadneedle) recently explored with an expert panel how the British government could issue a green bond to mobilise green investment and boost national growth, jobs and productivity.
For those who were unable to attend, we have summarised the key points raised in the one-hour discussion. Since the event was held under the Chatham House Rule, this short summary does not attribute the names and organisations to the views shared.
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‘I can’t think of a better time and place for the UK to lead this charge’
Throughout the discussion, it was agreed that the issuance of a British green bond would be a huge opportunity for jobs, growth and the development of green products, and would mirror the work its already doing to drive the green finance agenda.
The current timing for the British government to begin issuing green bonds was regarded to be well-suited for both stimulating economic growth but to also demonstrate climate leadership following its net zero ambition and ahead of COP26. One panellist, for instance, cited how France issued its first government green bond ahead of COP21 to demonstrate its commitment to the climate agenda.
‘Government must see that there is sustainable demand, value for money and its consistent with wider fiscal objectives’
One panellist revealed that the Government has been carefully considering the issuance of a green bond but would only plan to do so if three criteria were met:
There is a strong and sustainable demand
There is value for money
It is consistent with wider fiscal objectives
This disclosure helpfully set the framing for the remaining discussion in which the panellist sought to demonstrate how these three criteria are indeed being met.
‘The question of demand is not even on the table of doubt’
The panellists outlined how demand in the past seven years has increased dramatically, with asset managers, insurance companies and pension funds engaged in the market now worth just under $1 trillion (although a panellist suspected this could be up to $4 trillion if you include liquidity). The US is a significant buyer of green bonds as well as Europe, including the UK.
Using their experience, a panellist cited how 98 per cent of green bond issuances attracted new investors to their programme, demonstrating the potential to expose a new investor base.
‘Costs have decreased dramatically’
The issuance of green bonds requires additional verification and monitoring to demonstrate how the project being funded fits with the green criteria set out in the programme. This therefore does require generate additional costs. Following this explanation, a panellist outlined how costs have now reduced as the market has matured, citing how there are examples of green bonds now costing the same as non-green bonds.
In terms of the cost benefits, panellists also showed how green bonds can help lower risks across the whole of an investment portfolio due to their better performance and low volatility. Additionally, typical investors of green bonds tend to be ‘sticky’, holding onto their investment until its maturity, while also trading similarly to non-green bonds due to the high demand.
But does ring fencing funding tie the hands of future governments?
An attendee raised the question of how government green bonds may tie the hands of future government spending commitments. In response, a panellists said that the future governments area already been driven in a specific direction due to the net zero legislation; there is going to be constant demand for green bonds in the future and so no hands are being tied. Conservations surrounding ESG criteria are increasingly happening and every investor in the future will be asking these types of questions regardless of what type of bond is being issued.
‘What does this mean for the City of London?’
Another major point regularly raised was how the issuance of a green gilt would build on the City of London’s reputation as a world-leading finance centre, especially in the context of Brexit and ESG investing. The City has both the experts and the whole ecosystem to make this a success, as well as the investors generating the demand. To cement the City as a real finance engine, it was argued that the Government must leverage the City’s skills and talent by seizing this opportunity.
As the panel discussion came to an end, the panellists summarised by reiterating how there is a strong and sustained demand, the cost is negligible compared to the benefits, and with COP26 approaching it makes sense for the Government to seize this opportunity. And in the words of the final panellist ‘they need to start this right now.’