The UK’s sovereign green bonds met with record demand. Andrew Holt reports.
As world leaders meet in Glasgow for COP26, it is worth noting that after much fanfare, the UK’s debut green gilts smashed expectations to attract record orders.
Investors queued up to buy the two UK government-backed green gilts, the first 12-year debt and second a 32-year bond.
The initial £10bn raised in September made it the world’s largest sovereign green bond to date, while it was followed up by a further £6bn in October.
The proceeds will finance several green projects, including beefing up Britain’s flood defences, expanding its renewable energy capacity and developing carbon capture and storage (CCS) technologies – all in line with the green financing frame- work the government published in July.
That said, the green gilts did not meet everyone’s expectations, with some investors claiming that the bonds do not meet the strict criteria for a green bond because they finance investments in blue hydrogen and carbon capture.
The first gilt, due to mature in July 2033, was priced at a yield of 0.87%. The slightly higher price that investors were willing to pay for the transaction meant this figure was fractionally lower than the expected price for a typical conventional gilt.
The second £6bn of new debt maturing in 2053 was priced at a yield of 0.01 of a percentage point below an existing 2052 gilt, trading at 1.37%.
Although much publicity surrounded the UK’s inaugural green gilt, the UK is far from the first country to tap this market. Germany, France, Spain, Italy, Poland and Hungary are among the countries that have sold green bonds.
The British government has faced on-going pressure from institutional investors wanting more products to fulfill their need for more ESG-focused investing.
UK chancellor Rishi Sunak has said that green government debt could become a pricing reference for companies that want to sell green bonds of their own.
Despite the price premium commanded by green debt, some investors are not convinced that cheaper borrowing costs on such bonds will push governments to increase their environ- mentally focused spending.
Nevertheless, the Climate Bonds Initiative forecasts that global green bond issuance is likely to surpass $500bn (£365bn) this year. Predictions are predicated on issuance reaching $227.8bn (£167.4bn) in the first half.
In comparison, issuance during the whole of 2020 reached $297bn (£218.3bn). Figures cover green, social and sustainability bonds from nations, businesses and other players.
