The RSMR Weekly Broadcast - Greenwashing, greeniums & the all new green gilt

There's no shortage of knowledge and expertise at RSMR! Each week 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 topical issues facing investors from liquidity to the future of alternatives to politics and the pound. We like to think of it as cracking content for the financial adviser. Have a read & get clued up...

Chancellor Rishi Sunak laid out plans for a green, post-Brexit financial services world last month, announcing that Britain will launch its first green sovereign bond in 2021, in a bid to capitalise on growing investor demand for assets that fund environmentally friendly projects. 

The market for investments with environment, social, or governance (ESG) focus has increased exponentially in the last few years. At our Harrogate conference in 2019, the launch of green gilts was discussed by Columbia Threadneedle Investments and in this week’s broadcast we’re looking at what the introduction of green gilts will mean, greenwashing, and the UK’s ambitious plans for a greener world.   

A gilt is a UK Government liability, issued by HM Treasury and listed on the London Stock Exchange. How are green gilts different from typical government bonds? The government won’t be able to use the funds to finance any policies they want, like employment or health, they must be directed towards renewable and clean energy.

This initiative will be the first in a series of new issuances as the government looks to build out a ‘green curve’ over the coming years. The money raised by the bonds will be used to help fund projects to tackle climate change, build infrastructure investment and create green buildings and jobs across the country. We’re not the first country to introduce green bonds, corporate and government issuance of green bonds is on the rise and they are already popular in the EU, with seven member states having issued sovereign green bonds since Poland issued the first in 2016.

Greenwashing can be an issue and fund managers are obliged to carry out due diligence to make sure that it’s avoided. Greenwashing is a form of marketing spin in which green PR and green marketing are deceptively used to persuade the public that an organisation's products, aims and policies are environmentally friendly. Green bonds have to meet guidelines defined by the Green Bond Principles; the legal documentation needs to state how the proceeds will be used, the issuer must outline the decision making process for determining eligibility, the proceeds should be separated from other funds and issuers must report at least annually on the projects funded by the bonds.

Under the Paris climate change agreement of 2015, all countries are obliged to update their commitments to cut emissions and deliver nationally determined contributions (NDCs) by the end of 2020. The UK government has pledged to cut greenhouse gas emissions by more than two thirds of what they were in 1990 by 2030. The UK's emissions promise is in line with what the Committee on Climate Change, which independently advises the government, says is necessary to meet the legally binding target of the UK reaching net zero emissions by 2050. The UK is the first major economy to announce its NDC and is ahead of most of the other big nations, but it’s an ambitious pledge given that current figures show that the UK has only reduced its emissions by 45% since 1990.

Although environmental concerns or ESG mandates are likely to be a factor, the main reason investors will buy green bonds is a belief that demand for them will be sustained. Green bonds are expected to trade at a premium and the new term ‘greenium’ describes this perfectly.

Green gilts will start to become permissible in some of the funds that we rate. By investing in green gilts, you’ll have the certainty of where your money is going with no exposure to any unwanted sectors, making portfolios more diverse and potentially more attractive.

Chris Cummings, chief executive of the Investment Association, said ‘financial services will be critical in driving the economy to net zero, and the launch of the UK’s first Sovereign Green Bond, combined with plans to make climate disclosure mandatory by 2025, are important and ambitious steps as we seek to build a more resilient and sustainable financial system’. The goal to go further and faster to save the planet is both admirable and ambitious. Cutting emissions and creating a greener planet is the right way forward in creating the climate jobs of the future and to keep global warming below 1.5 degrees.

QUIZ QUESTION: When was Rishi Sunak first elected to parliament?  

LAST WEEK'S ANSWER: Bots, in general, are estimated to make up roughly 37.9 percent of all internet traffic