UK "could spur more sovereign 'green+' bonds" in runup to COP

By Michael Hurley

The UK government has been urged to issue a ‘green+ bond’ that could be imitated by other sovereigns looking to raise the ambition of their climate goals in the run-up to COP26.

The proposals for a sovereign ‘green+ bond’ – that combines green and social considerations – have already been passed to the relevant departments of the country’s government, but there was no immediate indication as to the extent of government support for the idea. Early details of the proposals were revealed by Environmental Finance ahead of their publication yesterday.

The proposals were outlined in The Green+ Gilt: How the UK could issue sovereign bonds that deliver climate action, and argue that a such an issue would deliver five main benefits (See box below).

Nick Robins, sustainable finance professor in practice at the London School of Economics and Political Science (LSE)’s Grantham Research Institute, told Environmental Finance: “Sovereign bonds are really the [big] asset class, at the moment, because governments are raising unprecedented amounts of money to provide relief and support and funding for the Covid-19 recovery.

“The UK sovereign bond would be important for financing the UK’s net-zero [by 2050] ambitions and have a catalytic effect on green bond issuance across the UK financial system. I also think there's an attractive prospect of the ‘green+’ sovereign bonds model or similar models … from numerous issuers, industrialised and developing countries.

“In the run-up to COP26 this could be seen as one mechanism for connecting to the capital markets with ambitions both on recovery from the Covid-19 crisis and also net-zero and resilience more generally.”

The LSE developed the proposals in collaboration with the UK’s Green Finance Institute (GFI) and Impact Investing Institute. 30 investors, asset owners and organisations signed a letter of support for the proposals (see box).

The independent GFI and Impact Investing Institute are both part-funded by the UK government.

As host of COP26 in November next year, the UK is under pressure to show leadership on climate finance and cutting emissions. Prime minister Boris Johnson is hosting an online event on 12 December, where national governments will be invited to present more ambitious climate plans to limit global warming to 1.5°C.

Asked whether such pressure might cause the UK government to cut corners in rushing a green bond to market, Robins said: “This would be a green bond with the use of usual features in terms of reporting, and so on. It is generally the case that, when the UK does things such as this, it does them very seriously.”

He said the motivation for the ‘green+’ model – as opposed to either a ‘green’ or a ‘sustainability’ label – was to “make the social dimension particularly visible”.

“The plus is the social dimension, and I think that is particularly relevant in the context of Covid-19 and the recovery. We have seen the increasing issuance of social bonds. Investment in net-zero and resilience and so on can also have a lot of social benefits: skills, regional growth etc.

“The distinction between green and social [in labelled bonds] can sometimes be a little artificial – if you're investing in green, you will be generating jobs and you could be contributing to skills and regional growth.

“At the moment there are unprecedented levels of savings in the UK economy, because of the Covid-19 crisis [and lockdown]. The green+ sovereign bond is a mechanism for harnessing those savings, particularly through pension funds, in a way that can actually then back these increasingly clear signals of what a net-zero green economy recovery should look like.”

Robins added that there is strong investor demand for a UK green+ sovereign bond.

“What we were very struck by as we as we were in discussion with investors for this project was that this social dimension was very welcomed,” Robins said, citing comments by Schroders CEO, Peter Harrison, who supports such an issuance.