The UK has raised £10bn from the introduction of its first green gilt this week, with investors including ESG fund managers bidding more than £100bn.
The 12-year bond, due to mature in July 2033, is priced at a yield of about 0.9%, around the same as existing gilts of similar maturity.
“This bond was coming at close to fair value from both a green bond framework perspective and on relative value versus other UK gilts of similar maturities,” said Matthew Amis, investment director, rates management at Aberdeen Standard Investments (ASI).
“The lack of a significant greenium has certainly added to the huge demand.”
One participant in the issuance is the Rathbone Ethical Bond Fund, managed by Bryn Jones. “We have included the green gilts in the portfolio to manage duration and liquidity, while providing vital financing to future growth of the green economy and supporting the race to net-zero carbon emissions,” he said.
“We expect this year’s bonds to encourage more companies to start issuing green bonds as they recognise the strong demand for such securities. This should help broaden our opportunity set in sterling issuance.”
Another participant is River & Mercantile, which will swap out non-green gilts of similar maturity.
Mark Davies, managing director, derivatives at River and Mercantile, said: “Green gilts offer pension schemes a potentially low-cost and simple governance approach to demonstrate a contribution towards meeting the Paris Agreement, as we know they will be directly invested into green projects.”
In July, the UK government announced plans for £15bn of green savings bonds for renewable energy projects such as wind and solar power. The Debt Management Office is expected to announce a 30-year green gilt next month.
At the time, the UK’s green financing framework was announced, industry experts praised the plans as a “good start”, but some pointed to the UK being “behind the curve” on issuance.
More than 680 green bond issuances were launched globally in 2020, raising a total of $227.6bn (£163bn), according to analysis by Linklaters. Almost 90% of the global value of green bonds has been from issuances from European nations.
But although 16 countries have issues sovereign green bonds so far, the UK’s will be one of the largest to date.
Industry experts were also divided on the detail given about what green projects will be funded during the announcement in July.
On this week’s green gilt sale, ASI’s Amis added he was “encouraged” by the creation of a separate general account by the Treasury where the proceeds will be held and tracked.
“What matters to us is the use of proceeds,” he said. “Information contained with the Green Register also allows investors to track expenditure towards eligible investments.”
Kate Elliot, head of ethical, sustainable and impact research at Rathbone Greenbank Investments, added: “This financing framework is a tool to accelerate a clear existing sustainability pathway rather than a fig leaf to hide a lack of climate commitments.
“It is great to see that investors’ concerns regarding nuclear power have been reflected in the government’s decision to explicitly exclude it from the list of eligible projects, preventing exposure to a significant area of concern. Additionally, biodiversity and natural capital are prioritised, while the inclusion of nature-based solutions such as peatland restoration is certainly encouraging.”
Richard Carter, head of fixed interest research at Quilter Cheviot, concluded: “While issuance appears to be a resounding success, the proof will be in the pudding for the bonds eventual effectiveness. We need to see evidence the proceeds are actually being used for projects that drive the transition to net zero and result in job creation in the green economy. Otherwise, the green gilt project risk being labelled a PR sideshow.”