Financing a net positive future for the UK

Rishi Sunak to announce £15bn green finance plan

June 30th, 2021, saw the publication of the UK Government’s Green Financing Framework. First announced last November, the document outlines at a high level how a combination of ‘Green Gilts’ (fixed-interest loan securities issued by the UK government) and ‘Green Savings Bonds’ issued by NS&I will help to finance the transition to a green economy, tackling environmental challenges and creating green jobs across the UK. Supporting Chancellor Sunak’s broader ambition to turn Britain into a world leader for low-carbon financial services, this framework, at national level, provides an opportunity to show leadership in supporting the existing activities of individual banks, and to offer individual consumers access to a simple, low-risk impact investment product on a national scale.

What does this framework mean, and how will it work?

Whilst gilts are sold to institutional investors, such as insurance companies and pension funds looking for fixed income returns, the green savings bonds offer personal investors an opportunity to support green projects while receiving a fixed rate of interest on their savings over a three-year term. The money raised by both products will help to finance low-carbon schemes, such as zero-emissions buses, offshore wind, and investments to boost biodiversity and natural resources, such as tree planting. The framework document sets out the basis for identification, selection, verification, and reporting of the green projects eligible for financing, using the proceeds of selling either the gilts or the bonds.

Are Green Bonds a new idea?

In the UK market, the 2017 Green Bond from Barclays was the first issued by a UK bank, using UK assets. Proceeds from issuing the green bond were used to finance Barclays residential mortgages on properties which were in the top 15% of the lowest carbon intensive buildings in England and Wales, based on estimated energy efficiency. These properties were identified using Energy Performance Certificate (EPC) data (we touched on EPCs during our talk on sustainability labelling earlier this year).

Many more bonds have been issued since, mainly by large corporates looking to invest in delivering more sustainable outcomes for their business and their clients. Since it announced its first Green Bond in 2017, Anglian Water has used the proceeds (circa £800m) to fund 850 capital investment projects which are expected to save or avoid over 160,000 tonnes of carbon — a 61% reduction from the company’s 2010 capital carbon baseline.

Steve Buck, Chief Financial Officer for Anglian Water, said,

“We made history in 2017 when we became the first ever [UK] public utility to launch a Sterling Green Bond, and we are very proud that all our capital activity meets the strict environmental criteria set for Green Bond investment.”

Anglian Water projects funded by the Green Bonds must contribute to five environmental objectives: climate change mitigation; climate change adaptation; natural resource conservation; biodiversity conservation or pollution prevention and control.

To support client and other stakeholder demands for a more sustainable built environment, British Land launched a Sustainable Finance Framework in 2020. They commit to using the proceeds of green bonds or loans to intensify focus on two areas where they can create the most benefit: creating a Net Zero Carbon property portfolio by 2030 and developing a place-based approach to social contribution.

Is the UK Government doing too little too late?

Critics of Sunak’s announcement, concerned at the lack of detail and scale of ambition, argue that £15bn represents ‘a drop in the ocean’ compared to the hundreds of billions needed to transition to a low carbon economy. Concerns have also been expressed at the interest rate that may be required to encourage mass take-up of the NS&I bonds and that the product differs little from existing ethical savings accounts such as those from Triodos Bank. On the positive side, others describe the gilts announcement as a ‘good start’ with Kate Elliot (Rathbone Greenbank Investments) suggesting the plans for how impacts will be reported looked interesting.

“The metrics within the framework go beyond the bare minimum to include additional environmental impacts including air quality and areas of natural land protected. The inclusion of social co-benefits — for example, job creation — is also good and emphasises that the low carbon transition can, and should be, a just transition.”

Time will tell. When September comes and the NS&I green bonds are offered for sale, will you invest?

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