Andrew Pitt: Green gilts are go!

24 Aug 2021 Expert insight

The UK is finally going green… Andrew Pitt from Rathbones explains why green gilts may be a popular investment with many charities looking to invest in sustainable ways

This content has been supplied by a commercial partner.

There was at least one universally welcomed announcement in the Government’s Spring Budget – the news that it’s going to start issuing green bonds this year. We’re thrilled that we’re soon going to be able to invest in these new green sovereign bonds. The first debuts on 21 September, with a second due to be issued in October. We reckon these green gilts may be a popular investment with many charities looking to invest in sustainable ways.  

At the end of June, the government published a ‘green financing framework’ for the £15 billion in green gilts to be issued this year. The framework details a comprehensive set of eligible expenditure categories for the money raised from these bonds, as well as outlining ways the government intends to measure the impact of projects that green gilts fund. 

We’ve been lobbying for green gilts for years so we’re delighted they’re on the way at last. We’re pleased that the government has listened to potential investors (like us!) who argued that nuclear power projects should be explicitly excluded from green gilt funding. We also like that biodiversity and natural capital projects are highlighted as funding priorities. It’s a further positive that the framework includes nature-based solutions (such as peatland restoration) as eligible for funding. 

The metrics proposed to measure the impact of projects funded go beyond the bare minimum (which would involve only calculating tonnes of greenhouse gases avoided) to include extra environmental impacts, like improvement in air quality and the size of the areas of natural land they protect. It’s also good news that these metrics will include projects’ social benefits (like their job creation potential). We think this should help emphasise that the transition to a low-carbon economy can and should be a just process that treats everyone affected fairly. 

The National Savings & Investment (NS&I) scheme is also planning to issue green savings bonds targeted at everyday savers, and the money raised will help fund Prime Minister Boris Johnson’s 10-point public investment plan for a “green industrial revolution”. This envisages that investing in clean energy, transport, nature and innovative technologies will kick-start the UK’s journey towards net zero greenhouse gas emissions by 2050. 

With other countries already issuing green sovereign bonds, it seems the UK government has finally woken up to the idea that these investments could help it meet climate change goals and objectives.

The timing is opportune. These bonds should help boost the government’s green credentials ahead of the next UN climate change summit (COP26) in Glasgow in November. And they follow a summer of grim environmental headlines that look set to reinforce popular support for climate action. Scorching temperatures in Canada and parts of the north-western US have been followed by deadly flooding in Belgium, Germany and central China. More recently, of course, we’ve seen awful devastation caused by wildfires triggered by protracted heatwaves in Greece, Turkey and Italy.

Climate change is widely believed to have played a role in all these exceptional weather events. The message was hammered home when the Intergovernmental Panel on Climate Change (IPCC), the world’s leading authority on climate change, issued its first report in eight years in early August. The IPCC found that the combined effects of human activity have increased the global average temperature by about 1.1C above its late 19th century norm. Without drastic moves to eliminate greenhouse gas pollution, our planet could warm by 1.5C above this norm in the next 20 years, bringing extreme weather and widespread devastation. 

These headlines may well further stoke already huge interest in investment approaches that help meet environmental, social and governance (ESG) goals. This interest suggests that there’s likely to be lots of buying demand for the green gilts. If this happens, this should encourage more companies and organisations to start issuing green bonds as they recognise the extent of the appetite for such securities. 

In our view, this should help broaden and deepen the green bond opportunity set. In particular, we hope to see more sterling-denominated green bond issuance as this has been pretty rare so far. Get ready for greener bond markets!

 Andrew Pitt is head of charities at Rathbones


More on