Financial basis

UK green gilts’ success points to price dilemma for retail version


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Newsletter: Moral Money

The highly successful launch of the UK’s first green sovereign bond this week paved the way for a tough decision on what interest rate to offer to personal savers when a retail version goes on sale later this year.

Institutional investors rushed Tuesday to buy the first ‘green gilt’ in a record sale, with the UK becoming the latest government to borrow money from the bond market pledging to fund green initiatives.

Supported by a strong demand for environmentally friendly instruments, green gilding was rated at a yield of 0.87%, about 0.025 percentage point lower than what might have been seen on a conventional gilding show.

The result leaves the government with a tough pricing decision as it plans to launch £ 15bn of new Green Savings Bonds through National Savings & Investments, the government-backed savings scheme, ahead of the end of the year.

NS&I said the money raised under the green program would be transferred to the treasury and help “make the world greener, cleaner and more sustainable.”

But environmentally conscious investors have yet to hear what interest rate they will be offered to lend money to the government’s green initiatives. And setting the rate involves a delicate compromise between the public purse and the pockets of savers.

If the Green Savings Bond offered investors the current ‘market benchmark’ for retail savings of 1.8%, the scheme would cost taxpayers £ 210million per year, according to Laith’s calculations Khalaf, head of investment analysis at AJ Bell, because the government could borrow the same amount at a better rate in the bond market.

However, setting green savings bond rates lower to avoid additional costs to the Treasury might seem unattractive to potential clients on a financial basis.

NS&I has seen its market share shrink since last October when it cut rates for highly competitive retail savers by 1.15% on its popular 0.01% income bond.

“There will of course be questions as to whether these green finance initiatives are entirely necessary, given that the government could simply raise funds through conventional gilts and NS&I accounts to fund their green spending priorities,” said Khalaf.

NS&I said details of the bonds would be available when they go on sale on the agency’s website later this year.

The dilemma for the government echoes criticisms of green bonds by some investors and climate activists who argue that governments should direct all their spending towards their climate goals and borrow money at the most competitive market rates, without resorting to of green brand sales.

“This is largely a public relations exercise,” said David Barmes, economist at Positive Money, a nonprofit advocacy group. “In reality, it is not really necessary to have sovereign bonds labeled green.”

The head of the UK government’s debt management agency, Robert Stheeman, also expressed reservations about green bonds last year, before the government launched its program. Stheeman said the bonds would be a “token” step unless investors were willing to pay more for them.

Green bond advocates argue that symbolism is important in demonstrating the government’s commitment to making finance greener. The UK is behind Germany, France, Spain, Italy, Poland and Hungary in placing green bonds on the market.

“The new launch is an extremely positive step for the UK government,” said Mark Healy, portfolio manager at Axa Investment Managers. He said this “shows the commitment to become a leader in the fight against climate change”.

Other benefits cited by lenders of green bonds include the additional liability that comes with this form of debt, since the government is required to devote the revenues to environmental projects that meet certain standards and must be accountable for use. funds.

Green bonds have gained momentum around the world. Moody’s expects $ 450 billion in green bonds to be issued globally in 2021, up from around $ 300 billion last year

In the UK, Tuesday’s sale drew a record £ 100bn in orders for £ 10bn in 12-year debt. Exceptional demand has helped push prices up, which will save the Treasury £ 28million over the life of the bond according to HSBC’s calculations.

The willingness of retail investors to follow suit will be tested over the coming months. The Green Savings Bond will run for three years and investors can participate for between £ 100 and £ 100,000.

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