What if the only incentive we needed to stop global warming was to make money doing so? Whoever said there is no ethical consumption under a capitalist structure has clearly not heard of green bonds.
Earlier last week, the Chancellor of the Exchequer, Rishi Sunak, announced that at least £15bn in “green” bonds would be introduced in the summer. The bonds will offer investors the opportunity to fund environmentally responsible projects aimed at transforming the UK into a zero-emission economy by 2050.
The green sovereign bonds will be offered to retail investors and are expected to
help fund important investments in renewable energies, such as wind and hydrogen energy, as set out in last year’s 10-point plan for a green recovery. Green gilts are the latest development in a trend among investors that attempt to balance environmental social and governance (ESG) goals with returns on investments that have been gaining strength in recent years. The global market for green bonds represented $270bn in 2020, and an additional $500bn in green debt is expected to be issued by governments and companies in 2021.
The UK would become the latest government to issue environmentally focused debt.
Other economies that have issued green bonds include Germany, Poland, France, Sweden, Ireland and Italy. The latter just had a very successful opening of €8.6bn on the 3rd of March. However, the plan to sell more than £15bn would mean the UK would be making the largest introductory offer for this type of bond.
Although the inaugural offer's size is significant, the UK has arrived late to the green bond market compared to other European economies. Poland launched its green gilts in 2016 and was quickly followed by France in 2017. Environmental activists have been critical of the programme for not being ambitious enough. They argue that the UK will need greater funding if it is to become emission neutral by 2050 and catch up with other European economies, which are expected to introduce an additional €40 to €45bn in green bonds in 2021.
More details on the structure of the bonds, including their time to maturity and yield, and what projects will be funded by the bonds will be given in June. However, because rates have remained so low, experts and investment retailers are cautious about the gilts' expected yield.
Nevertheless, if the demand for green sovereign debt remains high despite the potential low yield rates, it may provide a strong signal of investors’ commitment to ESG goals over profits. The introduction of green bonds is a strong foot forward in Sunak’s desire to make the UK the world's green financial capital. Most importantly, it is a stark difference to the usual relationship that financial markets have with our natural surroundings, such as the introduction of water into the futures market, which cast a dismal picture of the path we are headed towards. Instead, the introduction of green bonds demonstrates the potential role that financial markets can have with more holistic environmental and social aims.