18 Oct 2021
There's no shortage of knowledge and expertise at RSMR! Every fortnight we get our heads together and talk about events in the world and how investments are affected by them. Our Broadcast tackles a wide range of issues facing investors from green gilts to the legislation of tech giants and unregulated investments to the changing face of infrastructure investing. We like to think of it as cracking content for the financial adviser. Have a read & get clued up...
Under the 1992 United Nations Framework Convention on Climate Change (UNFCCC), every country is legally bound to ‘avoid dangerous climate change’ and find ways to reduce greenhouse gas emissions globally in an equitable way. World governments have been meeting for nearly three decades to discuss a global response to the climate emergency and define national targets. COP26 (COP stands for Conference of the Parties under the UNFCCC), was postponed last year due to the Covid-19 pandemic but will finally be held in Glasgow at the end of October, with over 120 world leaders taking part.
The current national targets, known as nationally determined contributions (NDC), aren’t enough to hold the world within the temperature goals set at the Paris conference in 2015 and all countries are now being urged to revise their NDCs before COP26 in line with a 1.5C target, the lower of the two Paris goals. If the world is to stay within the 1.5C limit, emissions need to be reduced by 45% by 2030 and to net zero by 2050, no mean feat.
Green gilts and bonds raise money for green projects, feeding into the aims of the various nations involved in COP26. We’re a long way off becoming carbon neutral, and all nations need to step up their activity and strategy to achieve their NDCs. Green finance is a crucial part of the grand plan and the UK launching its first green gilt in the run up to COP26 shows the government’s commitment to tackling climate change.
Government bonds, or gilts, are sold to institutional investors and provide a fixed rate of return until their expiry. The UK’s inaugural green gilt is a 12-year bond, maturing on 31st July 2033 and the world’s first standalone retail green savings bonds will be issued by NS&I later this year, creating jobs, and giving UK investors the opportunity to contribute to the net zero goal. These products are long-awaited by the investment world and now the flood gates have been opened, there’s a tidal wave of interest from investors.
The market for investments with an environmental, social, or governance (ESG) theme has exploded in recent years with roughly £189 billion of green bonds sold last year alone. How are government green bonds different from standard government bonds? With typical government bonds, the government can use the funds to finance any policies such as employment or health but with green bonds, the funds can only be channelled into renewable and clean energy projects.
The UK’s first green gilt went on sale last month, it was seriously oversubscribed and raised a staggering £10 billion. The gilt will fund green government projects such as offshore wind farms, decarbonisation of homes and buildings, zero-emissions public transport, solar and hydro power and flood defences and had investors gathering in droves, resulting in the largest ever order book (£100 billion) for a sovereign green transaction. When the gilt was issued, it was priced at a yield of 87 basis points, slightly higher than investors were willing to pay, but this meant that the transaction price was 0.025 percentage points lower than the expected price for the equivalent conventional gilt, saving £28 million for the treasury over the life of the bond, just through sheer appetite to own the product, demonstrating the effect of a green label.
Why are green gilts so appealing to investors? Corporate green bonds are not always as green as they may appear and there’s pent up demand for specifically packaged, truly green products that openly demonstrate direct funding into worthwhile projects that are part of the green finance agenda of the UK government, and with the current energy crisis and COP26 initiatives, these projects couldn’t be more relevant or pressing. The EU is also looking to raise funds through green finance and has just issued their own product. The €12bn European green bond, the largest green bond ever issued, was more than 11 times oversubscribed with demand totalling €135bn.
What will come out of COP26? COP26 will be the biggest summit the UK has ever hosted and the most significant climate event since the 2015 Paris agreement. World leaders will report back on progress and make decisions on how to cut carbon emissions and all nations will be looking at ways they can fund the resulting goals and plans. Within the last month, the UK has issued its first green gilt, the EU are now hot on our heels and all nations are likely to follows off the back of COP26.
In terms of the green investor space, this is just the beginning. With green bonds, the investment is impactful, pinned down, quantifiable, open, and incredibly attractive to investors.
The path towards zero emissions won’t always run smooth and there’ll be many hurdles to overcome along the way, but green gilts have entered the investment space with a long overdue bang, predicating the direction of travel and helping us to pave the way towards a greener and brighter future.
The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
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