Pathway to Cop26: Green Gilts: It's easy being green
Gareth Davies MP
The Conservative Party
It was Margaret Thatcher who once helped define the mission on climate change when she said “global warming is real enough for us to make changes so that we do not live at the expense of future generations”. Whilst debt normally lets us live at the expense of tomorrow, issuing green gilts will allow us to invest in our planet’s health – future generations will need it.
The green recovery problem
Last year, in 2019, the average global temperature was 1.1 degrees Celsius higher than the pre-industrial period, a year which concluded a decade of exceptional global heat, melting ice and rising sea levels driven by human activity. 1
Going forward, unless we meet this challenge, almost all the world’s coral reefs will die, millions will be displaced by rising sea levels. The frequency and intensity of droughts, storms and floods will increase significantly.
Our planet is changing in a way that will affect all of humankind. Put simply, this is the challenge of our time.
The UK has been a leader in this struggle for our planet. Last year, Theresa May oversaw the passing of the 2050 Target Amendment, making Britain the first major country in the world to legislate a 2050 target for having net zero emissions.
And in 2016, our country joined nations from around the world in signing what is now known as the Paris Agreement. An agreement, legally binding us to limit global temperature increases to no more than 2 degrees Celsius above pre-industrial levels.
Next year, Britain will host COP26, bringing countries together again. This is the most important international meeting on climate change since Paris. Britain will be on show so let’s make sure we have done everything to show off our leadership on climate change policy.
At the same time as our environmental crisis, we have an unprecedented public health crisis placing an almighty toll on the UK economy. Many businesses are suffering despite the extensive Government support offered. Billions in loans, furlough and support have let us survive the crash, but now we need to thrive in the recovery.
The environment is not simply a separate problem to the economy, but an opportunity to invest and level up. It is a chance for the Chancellor to reframe and redirect our economy to meet the long-term needs of our people and the planet.
A renewed focus on capital investment to achieve economic growth and productivity will be critical. The planned “infrastructure revolution” outlined in the 11 March budget must go ahead, as must the “levelling up” agenda. But let’s make it a green infrastructure revolution, and level up to create new green jobs.
As we come out of this crisis, the UK Government should issue a sovereign green gilt to specifically fund capital investment in infrastructure that will help stimulate the British economy after the coronavirus outbreak, creating new jobs, technology and transport.
A conventional ‘gilt’ or a ‘bond’ is simply a loan made to the Government. However, green bonds are different in that they ring-fence funding for green projects. Green bonds could be the tonic for all our ills - it will fight climate change, it will raise capital to invest in infrastructure, jobs and our economy and it might also lower the cost of our debt.
The capital raised from green gilts could help the Government fund our manifesto commitments including £1 billion for electric vehicle charging stations, £800 million for carbon capture, £350 million on cycling infrastructure and the £640 million nature for climate fund that will support us in planting 30 million trees a year.
But it would also allow us to raise funds to go beyond these commitments to invest in nuclear power and low carbon transport. France has recently announced €30 billion of green spending as part of a comprehensive green recovery. 2 This includes €9 billion on the development of the hydrogen industry and new green technology. Much of this funding will come from their green bonds.
Clearly there are plenty of investment opportunities to tackle climate change that could be funded by green gilts. And of course, this spending would stimulate the economy and enable the creation of new jobs. The Government’s £40 million Green Recovery Fund is expected to create 3,000 jobs.3 It requires little imagination to see that green gilts means investment and jobs - green gilts could finance the levelling up we need now.
Britain is the world’s leading financial centre, yet we are surprisingly behind the curve when it comes to utilising capital markets to finance green growth. Other countries have already seen the benefits I have laid out.
The Netherlands, France, Poland, Ireland, Sweden, Belgium and Germany have all issued a sovereign green bond. Currently there is $1 trillion of green bonds in circulation. 4 These saw oversubscribed demand, the French have been the most successful to date, raising over £20bn mainly from other countries to fund their green infrastructure. The French bonds were over three times oversubscribed, whilst German bonds were oversubscribed 5 times over, proving there is a wealth of demand.
Despite not having our own green bonds, UK investors are very active in the global green bond market. 28% of money raised by French green bonds came from British investors. Yet, only 2% of the world’s outstanding green debt is denominated in pound sterling whilst over 40% are denominated in euros.5
So why has the British government so far held back on a green gilt? Well, it is partly down to concerns expressed by the Debt Management Office about whether a green gilt will be more expensive to issue. Their philosophy follows the words of Kermit the Frog “It’s not easy being green.”
But if we look at the other sovereign green bonds on the market, they either trade flat to, or even slightly tighter than their non-green peers. This means they might even reduce the cost of Government borrowing. Economists’ research,6 Barclays,7 the Climate Bonds Initiative8 and traders all agree that green bonds provide a lower rate of interest for the government, if not the same rate as conventional bonds.
In September, we saw Germany make a twin issuance of green and conventional bonds at the same time. No one was surprised to see the green bonds traded with a lower yield.9 No one, presumably except for the Debt Management Office. Even if investors lost interest in Germany’s green bonds, they can swap them for conventional bonds with the central bank - ensuring green bonds could never be priced lower than conventional bonds.
The only real additional cost will be in the reporting on the use of proceeds, but these will be far outweighed by the benefits borne from the investment raised for our country’s infrastructure. Regardless, solid reporting on the environmental effects of our green investment should be implemented with or without green gilts - it can hardly be seen as a downside!
Finally, in addition to being a cost effective way of fighting climate change, growing our economy and building jobs, it would also put a marker down for Britain as a future green finance leader. At COP26 it will show that both the Government and the City of London can innovate, adapt and evolve to meet future needs.
Green Gilts are an easy, tried and tested, solution to both levelling up and fighting climate change. Contrary to the opinion of both Kermit the Frog and the Debt Management Office - it is easy being green. With green gilts as a policy, we have no excuse but to honour Margaret Thatcher’s words. Let us show the future that this generation did not live at the expense of theirs.
1 Cheng, L., and Coauthors, 2020: Record-setting ocean warmth continued in 2019. Adv. Atmos. Sci., 37(2), 137−142, https://doi.org/10.1007/s00376-020-9283-7.
4 https://www.climatebonds.net/files/releases/media_release-green_bonds_255bn_in_2019- new_global_record-latest_cbi_figures_-16012020.pdf
6 Sze, Angela and Wan, Wilson and Wong, Alfred, The Economics of the Greenium: How Much Is the World Willing to Pay to Save the Earth? (May 22, 2020). HKIMR Working Paper No. 09/2020, Available at SSRN: https://ssrn.com/abstract=3607791 or http://dx.doi.org/10.2139/ssrn.3607791
8 https://www.climatebonds.net/resources/reports/green-bond-pricing-primary-market-h2-q3- q4-2019