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Author: Don Obrien

UK’s green gilt success points to pricing dilemma for retail version


Newsletter: Moral Money

The blockbuster launch of the UK’s first green sovereign bond this week has set the stage for a tough decision on the interest rate to be offered to personal savers when a retail version goes on the market later this year. 

Institutional investors rushed to buy the first “green gilt” on Tuesday in a record-setting sale, as the UK became the latest government to borrow money on the bond market promising to fund green initiatives.

Buoyed by strong demand for environmentally friendly instruments, the green gilt was priced at a yield of 0.87 per cent, around 0.025 percentage points lower than might have been seen on a conventional gilt issue.

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

NS&I said money raised in the green scheme would be passed to the Treasury and help “to make the world greener, cleaner and more sustainable”.

Line chart of UK government 10-year yield (%) showing Yield on conventional 10-year sovereign bond

But environmentally minded investors have yet to hear what interest rate they will be offered for lending money to the government’s green initiatives. And setting the rate involves a tricky trade-off between the public purse and savers’ pockets. 

If the Green Savings Bond offered investors the current “market-leading rate” for retail savings of 1.8 per cent, the scheme would cost taxpayers £210m per year, according to calculations by Laith 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 the Green Savings Bond rates at a lower level to avoid extra costs for the Treasury could look unattractive to potential customers on a financial basis.

NS&I saw its market share shrink since last October when it slashed rates for retail savers from a highly competitive 1.15 per cent on its popular income bond to 0.01 per cent.

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

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

The dilemma for the government echoes criticism 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 rates in the market, without resorting to green-branded sales. 

“A lot of it is potentially a bit of a PR exercise,” said David Barmes, economist at Positive Money, a not-for-profit advocacy group. “In reality, there isn’t really a need to have green-labelled sovereign bonds.”

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

Defenders of green bonds argue that symbolism is important to demonstrate the government’s commitment to making finance greener. The UK is behind Germany, France, Spain, Italy, Poland and Hungary in bringing green bonds to market. 

“The new launch is a hugely positive step for the UK government,” said Mark Healy, portfolio manager at Axa Investment Managers. He said it “shows commitment to becoming a leader in combating climate change.”

Other benefits cited by backers of green bonds include the extra accountability that comes with this form of debt, since the government is required to devote the proceeds to environmental projects that meet certain standards and must report on the use of the funds. 

Green bonds have gathered momentum worldwide. Moody’s expects $450bn of green bonds to be issued worldwide in 2021, up from around $300bn last year

In the UK, Tuesday’s sale drew a record £100bn in orders for £10bn of 12-year debt. The bumper demand contributed to a higher price, which will save £28m for the Treasury over the life of the bond according to HSBC calculations. 

Whether retail investors are willing to follow suit will be tested in the coming months. The Green Savings Bond will have a three-year term and investors will be able to participate for between £100 and £100,000.



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Oliver Bolt

Oliver Bolt

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