Green Gilts offer investors the chance to invest in climate change

UK chancellor Rishi Sunak has set out plans for new “Green” Gilt-edged bonds which he believes will help the UK reach its carbon emission and climate change commitments and help to establish the UK as a green finance hub.

The decision follows similar moves in Germany, France and the Netherlands and comments from European Commission president Ursula von der Leyen, who suggested that almost a third of the EU’s Covid recovery program should be funded through the issue of sustainable and environmentally friendly debt.

So how exactly will the new Green Gilt bonds work?

The bonds will function in the same way that any other debt issued by the UK govt does, however, the funds raised through the issuance will be specifically targeted at low carbon projects. Helping to finance a reduction in carbon emissions from transport, retrofitting homes to make them more environmentally friendly and building out low carbon infrastructure and sustainable sources of power generation for example.

The chancellor will also introduce a requirement for all UK- listed companies to disclose the climate change risks they face by 2025 and make necessary provisions against those risks.

Climate change is likely to be front and centre on the global agenda after Joe Biden takes over as president in the USA in January 2021, and he has already committed to rejoining the Paris climate accord.

What returns might we expect from Green Gilts?

The first UK green gilt will be issued in 2021 no details have been released as yet but the global market in green bonds has already reached some $250 billion dollars or around 3.50% of the global debt issuance in 2019 and it is forecast to grow rapidly from here.

Britain has sold a significant amount of debt in recent months to help fund the costs incurred by the covid pandemic and some £373 billion has been raised since April. But for now, at least UK 10-year bond yields, a measure of the cost of government borrowing, remain at less than half their pre-coronavirus levels, at +0.38%.

Germany issued a green bond back in September selling €6.50 billion of 10-year debt at a yield of less than 1 basis point (a basis point is one one-hundredth of a percent).

That may not sound attractive until we consider that standard German govt 10- year bonds currently yield – 0.52% meaning that investors pay the German government to borrow their money.

So its seems likely that UK green gilts might trade at a higher yield than standard 10-year debt. Of course, much will depend on market conditions at the time and perhaps whether the Bank of England will add green gilts onto its QE shopping list in future.

How will investors be able to participate in Green Gilts?

The UK debt management office issued a brief statement confirming the chancellor’s plans but offered no details beyond saying that further information will be released in due course.

However the usual channels for bond issuance are likely to be used and investors should be able to apply for the green gilts through their stockbroker or bond brokers and banks, or via the debt management office’s own purchase and sale service. However, to use that they first need to seek approval by completing an application form.

We will, of course, share more details and news of any green gilt issues with Good Money Guide users, as they become available to us.

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