Sunak’s green gilt to help ESG access to corporate bonds

Sunak’s green gilt to help ESG access to corporate bonds
 Rishi Sunak, chancellor of the exchequer. Credit: Toby Melville.

The chancellor’s plans to launch Britain’s first green sovereign bond will likely result in a wider range of green corporate bonds for investors, according to an ethical bond expert.

Noelle Cazalis, manager of the Rathbone Ethical Bond fund, told FTAdviser the “most exciting” part of Rishi Sunak’s green gilt announcement was that it would send a signal to the corporate bond market that there was a strong demand for green fixed income products.

She said: “The secondary effect of the green gilt is more exciting to us. It’s a signal to the green bond market that there is a demand there to issue green bonds in sterling.

“Only 2 per cent of green bonds have been issued in sterling and there is such a strong imbalance of green bonds supply and demand. 

“But if the UK government issues a green bond and it was successful, then corporations could issue in sterling as well. It would prove the market and the demand is here.”

Ms Cazalis said corporations were more likely to issue green bonds in Euro because it accounted for 48 per cent of the green bond market, so there was more of a precedent in place for both investors and businesses.

The knock-on effect would therefore be that environmental, social and governance investors would have a greater choice of bonds for their portfolios, Ms Cazalis added.

She said: “Our investment opportunities will increase over the next few years, and I hope we will see more opportunities in sterling.

“The chancellor announcing his plans for a green gilt is a really strong first step.”

Mr Sunak announced last Monday (November 9) the government would issue its first ever green gilt next year to meet “growing investor demand”.

The money raised by the bonds will be used to help fund projects to tackle climate change, build infrastructure investment and create “green jobs” across the country.

Such gilts are already used in 16 countries around the world, including Germany and Sweden.

Ms Cazalis said the launch would allow ESG bond investors to access UK government gilts, which many had previously excluded from portfolios as the cash could sometimes be used to buy armaments.

She does not invest in UK gilts in the Rathbone Ethical Bond fund for this exact reason.

Ms Cazalis added: “If we felt this green gilt was ringfenced from armaments and we were happy with the transparency, we could then the use government bonds to provide us with access to low risk investments, and something very liquid.

“We would use green gilts in the portfolio to manage duration and liquidity and to be more tactical.”

ESG investing has boomed in popularity in recent years as fears over climate change have led investors to consider the impact of their money and as a growing number of millennials have begun investing.

Recent data from the Investment Association shows inflows into ESG funds have quadrupled in 2020 so far, with £7.1bn invested in such funds over the first three quarters of this year compared to £1.9bn last year.