UK offers green gilts amid flurry of investments targeting net zero

The UK's Treasury, responsible for its fiscal policy, fulfilled a pledge to launch the nation's first green sovereign bonds in a 3 March annual budget that explained its plans targeting finance sector greening.

The detail of how £15 billion (about US$21 billion) in green sovereign bonds, known as gilts in the UK, will be used to fund projects and infrastructure to meet national decarbonization objectives will be revealed in a framework document in June. The Treasury said the two green bond tranches would be issued in the summer and later in the year.

The UK's November decision to issue green sovereign bonds came after the finance sector ramped up calls to issue them. In 2019, UK-based asset manager Columbia Threadneedle wrote a letter to government ministers encouraging the bonds' use. This was followed last year by a green bond proposal backed by 30 asset owners and investors.

In addition to finalizing its green sovereign bonds, the Treasury also announced the public will be offered green retail government-backed savings accounts later this year, likely aiming to encourage consumers to buy into its greening agenda.

The Treasury's decision to issue the green sovereign bonds and investment options has not silenced critics, who say the UK government is running out of time to achieve its promised "world-first" pledge to be a net-zero country by 2050.

The UK government also pledged last year to publish its net-zero roadmap ahead of hosting Paris Agreement signatories at the UN Climate Change Conference of the Parties (COP26) in November. That same year, Prime Minister Boris Johnson released a 10-Point-Plan which set a series of targets for wind power, electric vehicles, and carbon capture, utilization and storage (CCUS) while promising £12 billion ($17 billion) in funding and to meet existing carbon commitments.

Critics have said the Treasury's funding commitments still fall short of the levels needed to put the country on a net-zero path or support Johnson's commitment to a "green industrial revolution."

Finance policy changes

Fulfilling prior promises, the budget came out the same day as a document describing plans for a National Infrastructure Bank (NIB) able to invest £22 billion (US$31 billion) in sectors such as sustainable fuels, carbon capture, and efficient heating.

In another investment-related move, the Treasury announced the appointment of the former head of the London Stock Exchange, Dame Clara Furse, to lead a task force on making the UK a hub for voluntary carbon offset markets.

Treasury pledges are only the tip of the policymaking iceberg. "The government needs to back these financial mechanisms with policy and regulatory frameworks that allow the UK infrastructure sector to reduce development costs and timelines and to unlock the wider 'wall of capital' that is increasingly seeking investment opportunities in the sustainable economy," said Norton Rose Fulbright finance partner Rob Marsh.

However, the Treasury earned high praise from a well-known figure in climate circles for rounding out its budget with a letter to the Bank of England asking the central bank to tweak its monetary policy to address net zero. "This recognizes that the goal of reaching net-zero emissions by 2050 is consistent, rather than in competition, with having a robust, stable, and thriving economy," the Chair of the Grantham Research Institute on Climate Change and the Environment, Lord Nicholas Stern, said in a statement.

This type of monetary policy adjustment can potentially tip the balance toward the UK's financial decarbonization, in contrast to the Bank of England's past corporate bond purchase programs that have funded utilities and skewed investment towards high-carbon sectors, according to a paper published by the Grantham Research Institute. Last year, the government launched an investigation into why the Bank of England had failed to address climate risk in its COVID-19 recovery finance package. The bank had admitted that parts of its investment portfolio contributed to 3.5 degrees Celsius (38.3 degrees Fahrenheit) of global warming by 2100, adding emissions that were "materially above Paris agreement goals."

A fraction of the recommended funding

And in fact, some observers have been pessimistic about progress to date. Far from progressing to net zero, the UK is currently emitting too much pollution to meet its legislated carbon budget, according to the government's arms-length advisory body the Climate Change Committee.

What's more, the government looks like it may miss the November 2021 deadline it set to create a plan to reach net zero, said the chair of the watchdog for UK government spending, the Public Accounts Committee, Meg Hillier in a 5 March report.

The Treasury's green sovereign bond plan will put the UK on par with the handful of countries in Europe, South America, Africa, and Asia already issuing such bonds. Europe's largest single green sovereign bond so far was from Italy on 3 March, although France has issued the highest value of green sovereign bonds in different tranches to date.

The UK is poised to compete with these countries for capital. "I do, however, think there will be considerable demand among investors for the UK's sovereign green bond— not least given the strong creditworthiness of UK government debt," said Norton Rose Fulbright London-based financial services law and regulation partner Imogen Garner.

The UK also needs to shore up its "patchwork" of existing green bond regulations to compete with international competitors that have a standard, with the EU currently developing its own Green Bond Standard. "In order to maintain investor confidence in the UK green bond market vis-à-vis those of its competitors, it will be essential that such standards are in place," said Garner.

Commenting on the relative size of green funding pledges in the budget, Senior Policy Fellow at the Grantham Institute Josh Burke said: "Whilst the green recovery package is relatively small by European standards, announcements on the NIB are welcome as it will be an important institution in driving a just and sustainable recovery program."

A co-author of a blog by the Tony Blair Institute for Global Change, Head of Productivity and Innovation, Jegar Kakkad, described it as "baffling why the government has chosen to give [the NIB] only a fraction of the funding recommended by the National Infrastructure Commission." The commission released its annual report in February that suggested establishing the NIB, as well as spending £30 billion (US$42 billion) on urban transport by 2040.

The government should have raised fuel taxes in a way that would allow the funding of electric vehicles purchases for those who are too poor to afford them, according to Tony Blair Institute Senior Fellow Tim Lord.

Other observers said the budget didn't seem green enough. "Ahead of COP26, this budget was a missed opportunity by failing to set out an unequivocal direction of travel towards a green zero-carbon future. [Chancellor of the Exchequer Rishi Sunak] has dropped the green recovery ball before the try line," said Nick Mabey, the CEO of environmental think tank E3G.

Funds for hydrogen, wind, carbon capture testing

While the Treasury's plan for green sovereign bond investments remains fluid, its budget underlined the government's emphasis on wind, carbon capture and hydrogen with smaller pots of funding for pilot-stage industrial transition projects.

The budget is supporting hydrogen markets with several million pounds earmarked for the Holyhead Hydrogen Hub, set to produce and distribute green hydrogen for use in trucks in Wales.

It is also funding the expansion of port industrial zones in Teesside and Humberside for servicing offshore wind farms.

In addition, the Treasury allocated funding to a business park in the hub of the Scottish oil and natural gas industry, Aberdeen, to be known as the Aberdeen Energy Transition Zone, which could supply green hydrogen for the transport sector.

Finally, it will fund a project to develop industry proposals in line with the government's North Sea Transition Deal, announced last year. The policy foresees public private partnerships decarbonizing North Sea oil hubs in Scotland and the northeast of England through carbon capture projects, renewable diversification, and hydrogen production.

Posted 11 March 2021 by Cristina Brooks, Senior Journalist, Climate and Sustainability