Unanswered questions surround government's green bonds plan

This article is part of
Guide to the Budget

Unanswered questions surround government's green bonds plan

The UK government intends, later this year, to add to the rising supply of investment products focused on Environmental Social and Governance (ESG) concerns when it brings to market £15bn of “green” bonds.

This marks a departure for the UK government as it will be the first time bonds have been issued with an explicit environmental focus. 

Several other countries, most notably Italy, Germany and France, have previously issued green bonds, and many companies also do so. 

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But unlike regular government bonds, the green bonds will be available via National Savings and Investments, and so available to retail investors. No interest rate has yet been revealed, but the intention is to sell two tranches of the bonds in the summer of 2021 and raise £15bn for the government's coffers.

Laith Khalaf, financial analyst at AJ Bell says: “The new NS&I green bonds are likely to sell like hotcakes, seeing as environmental concerns are really beginning to take hold with savers and investors.

"The product is expected to land in summer, hopefully enough time for NS&I to sort out the administration problems it has encountered of late, before it’s hit with a fresh wave of demand.

"The interest rate paid on the bond will be a key determinant of its success. Too low, and it won’t put bums on seats, too high and there are inevitably questions about costs to the taxpayer, as there were with George Osborne’s NS&I “Pensioner Bonds”.

"The green bond doesn’t form part of NS&I’s finance target for next year, which suggests the Treasury has high hopes for its popularity.”

David Czupryna, head of ESG at French asset management firm Candriam, says the most recent sale of green bond by the Italian government was oversubscribed, that is, there were more willing buyers for the bonds than there were available bonds.

He says the yield on the green bonds of many countries presently trades at a higher price (and so has a lower yield) than the regular government bonds of the same countries. 

Bryn Jones is fixed income director at Rathbones Unit Trust Management, and also an Investment Association representative to the government’s debt management office, which issues the UK's government bonds. 

Among his responsibilities at Rathbones is the management of about £2.4bn of assets in the Rathbone Ethical Bond funds. 

His long-standing policy is to exclude all regular bonds issued by governments on the basis that government’s maintain armies, and, in many cases own nuclear weapons, and so the bonds used to fund government expenditure are rarely ethical. 

Jones is however keen to look at the UK government’s plan to issue green bonds, which was announced in the Budget.

The plan is to issue £15bn worth, but he says there are many unanswered questions.

Maturity date

One of these is around the date to maturity of the bonds, and also the underlying assets the money will be invested in.