In Cannock, just off the M6 toll road in Staffordshire, new industrial warehouses have been built on the site of a former open-cast coal mine, disused for half a century. The new buildings, built with support from the local community, are highly energy-efficient, ranking in the top 1.5 per cent of all non-residential buildings in the UK for their energy efficiency. Financed by institutional investors, the development is expected to support more than 450 local jobs.
Moving towards a net-zero carbon future with a green sovereign bond
Now that the Government has announced that the UK will issue a sovereign green bond in 2021, we could see more investments like the one in Staffordshire, which can address both the climate emergency, and social renewal. With the economy suffering the effects of the pandemic, Brexit looming, and the UK’s chairing of the G7 and of the UN’s climate summit, COP26, next year, there has never been a better moment for the country to demonstrate leadership in this field and we applaud the Government for doing so.
Issuing a Green Gilt is an important step, which delivers on plans to move towards a resilient, net-zero carbon economy that will bring a range of positive social benefits such as creating green collar jobs, boosting skills and regional revitalisation. The addition of a new national infrastructure bank, to be set up by the Government to channel capital as part of the “levelling-up agenda, should make it easier to plan and deliver spending on green infrastructure projects across the country.
Growing demand for green finance vehicles with clear social and economic benefits
A Green Gilt is also a much-needed response to the investment community’s growing demand for investments that help secure a net-zero carbon future. A proposal for a Green+ Gilt with well-defined social and economic benefits, developed by the Impact Investing Institute with the Green Finance Institute and the LSE’s Grantham Research Institute, gained the support of 40 leading asset owners and managers, as well as organisations such as the CBI, TheCityUK and the Association for Financial Markets in Europe. Together, these investors represent more than £10 trillion in assets.
The proposal includes carefully selected social co-benefits for every environmental project category, recognising the urgent challenge, in the wake of Covid-19, to support economic renewal as well as combat climate change. As the government proceeds with the design of its first Green Gilt and then future issuances, as it has signalled, use of proceeds should focus on channelling money to places where it is most needed, in regions of the country historically underserved by private investment, and where it delivers on climate goals in a fair and accountable manner.
Upgrading infrastructure, supporting innovation and building skills
We believe that a Green+ Gilt would help address the lack of investment and productivity gap faced by the UK by upgrading infrastructure, supporting innovation and building skills. It would demonstrate the UK’s financial capability in sustainable finance, providing a template to encourage further issuance by the private sector and local authorities, as well as establishing a framework for further international issuance.
In Ireland and Belgium, domestic sustainable issuance by businesses and local authorities soared once their governments had issued a green sovereign bond. As well as providing an example to follow, green bonds also help diversify investor demand. In Poland, green investors made up nearly two-thirds of the demand for their labelled bond, almost none of whom had previously invested in Polish sovereign instruments. A Green+ Gilt in the UK would widen the investor base at a time of unprecedented public spending requirements, attracting the growing pool of green bond investors, and encouraging international investors to fund UK projects.
A just transition to a net-zero carbon economy
Supporting economic recovery whilst paying for the transition to a net-zero carbon economy is a powerful imperative. In the aftermath of coronavirus, a Green+ Gilt would help finance the UK government’s plan for a green recovery that focuses on jobs and skills, and on helping build an economy that is more resilient to future crises such as the one we are living through.
We tested our proposal, as it was developed, with fixed income market participants, who corroborated its appeal to the growing pool of UK and international green investors increasingly focused on social as well as environmental outcomes, and confirmed it would be a suitable investment for pension funds and other pools of savings, which have swelled during the pandemic. The addition of social co-benefits with well-defined metrics for each project was widely welcomed by the investors we consulted, with the focus on jobs and skills particularly well received.
Issuing a Green+ Gilt would position the UK as a global frontrunner in sustainable finance
The support we have received shows that there is real market demand for a sovereign bond that would scale up the UK’s drive to a net-zero carbon economy with clear social and economic benefits. This transition provides opportunities as well as challenges. Seizing these opportunities, and mitigating the negative consequences, is even more important given the impact of the pandemic.
By committing to issue a Green Gilt, the UK government has demonstrated its commitment to a net-zero economy. Issuing a “Green+” Gilt would establish the UK as a global frontrunner in sustainable finance, bolstering the City’s credentials for financial innovation. There has never been a better moment for the country to show market leadership in this field.