Green Gilts, also referred to as Green Bonds, are a type of fixed-income financial instrument. These are issued by government bodies and specifically aim to fund projects tackling climate change, finance infrastructure investment, and create jobs across the country. Their issuance reflects government efforts to address environmental challenges and promote sustainable development. These bonds are typically asset-linked and backed by the issuer's balance sheet and are considered a burgeoning sector within the sustainable finance landscape, posing impressive growth in recent years.
From 2021, the UK government has begun issuing green gilts in an effort to implement positive environmental change. The latest auction was held on October 2023 in which £2.2 billion were sold and £17.1 billion of 1.5% ‘Green Gilt 2053’ have now been issued in total. All results of gilt auctions are published by the DMO on their website. Driven by a growing awareness of environmental issues, further issuances are to come, indicating the government's commitment to green financing and the anticipated popularity of these financial instruments among investors.
The green bond market is global, with issuances from countries across the world. Several leading economies, including the EU, the UK, and Germany, have taken the first steps in issuing green gilts. The projects that are typically financed are related to renewable energy, energy efficiency, and environmentally friendly initiatives. These bonds are characterised by their allocated use of proceeds and are subject to rigorous reporting and verification standards. Regulations and frameworks, such as the EU Taxonomy for sustainable activities, provide clarity and confidence for investors, with issuers being required to disclose project details and their environmental impact. This transparency is crucial for investors, as it allows them to assess the effectiveness of their investments in contributing to sustainability goals while fostering trust in the market.
The global market for green gilts is expected to expand as more countries join the sector. Emerging economies may take up the opportunity, contributing to a more prevalent adoption of sustainable finance practices. Governments around the world are adopting policies that support a transition to a low-carbon economy, a key element of which involves the issuance of green bonds to finance these forward-thinking initiatives. This trend is fueled by a growing group of environmentally conscious investors who are actively seeking investments that deliver both financial returns and positive environmental impacts.
Historically, the performance of green bonds has been comparable to traditional bonds, offering a competitive yield. The risk profile of green gilts is also similar to other types of government or corporate bonds, making them an attractive option for risk-averse investors. Investors, both institutional and retail, are attracted to financial instruments, especially those with a mandate for sustainable investment. This includes institutional investors like pension funds, insurance companies, and investment funds that are committed to responsible investing.
The outlook for the green gilt market is highly optimistic, with several factors pointing towards sustained growth in the coming years. The appeal of sustainable government bonds is likely to intensify with the growth of environmental, social, and governance (ESG) investing being implemented into portfolios. Additionally, the range of projects eligible for green gilt financing is expected to diversify. While renewable energy projects have dominated the market, there is a growing recognition of the need to address broader environmental challenges. This may include initiatives related to biodiversity and sustainable agriculture.
Overall, the green gilt market has emerged as a pivotal force in the union of finance and sustainability. They play a crucial role in addressing the urgency of climate change and achieving the Sustainable Development Goals (SDGs), thus influencing global economic trends. However, the market for green gilts faces challenges such as the requirement for standardisation, concerns over 'greenwashing', and the necessity of ensuring that the funds raised are used for genuinely green projects. While challenges remain, the overall trend indicates a promising future for green gilts as a key tool in financing a sustainable future.
What does this mean for Local Authorities?
Local Authorities could aim to add some of these bonds to their investment portfolio, to align with their own environmental investment criteria.
Local authorities with borrowing requirements could look to emulate such an issuance, by also issuing a novel product, such as a Local Authority Green Bond.
Please contact Arlingclose if you would like to discuss this further.
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