Next month’s Budget presents an opportunity for Rishi Sunak, the new Chancellor of the Exchequer, to make a change that could be of great benefit both to the UK and to ethical investors.
One of the items at the top of our wish list for 11 March would be for the government to legislate to enable the UK to issue “green” gilts.
Green gilts are (or, rather, would be) government bonds whose proceeds would be earmarked for specific projects with an environmental or social benefit.
The attraction to ethical investors, including potentially our members, of being able to purchase green bonds is obvious.
Healthy Investment, a friendly society, has its origins in the nineteenth-century temperance movement and has always sought to invest in an ethical manner: this means, among other things, no direct investments in the alcohol, tobacco or arms industries.
Our fund managers can choose which companies’ equities to purchase and which corporate bond issues to support.
UK investors are leading the way in supporting green debt but they are forced to go abroad to do soThey can vote at shareholders meetings and, in other ways, exert direct pressure on the businesses in which our members’ funds are invested.
When, however, we seek the security that can only be offered by our own country’s sovereign debt, all UK investors have a stark choice: take it or leave it.
We can choose not to invest in companies that manufacture nuclear submarines but, if we want to hold gilts, we must effectively lend the government money to buy them.
There is, of course, an argument that, in a democratic country, investors all have the opportunity to choose the government, and thus the priorities on which the proceeds of gilt issues are spent, at the ballot box.
In practice no UK government in the last 100 years has been elected on 50 per cent or more of the popular vote.
A majority of voters will in almost every case have not voted for the government of the day.
Every government needs their money but none has, so far, been keen to listen to their opinions.
UK investors are, nonetheless, leading the way in supporting green debt but they are forced to go abroad to do so.
British investors have been some of the biggest buyers of green bonds issued by the Polish, French and Dutch governments.
The head of the UK’s Debt Management Office, which is responsible for issuing gilts, last month expressed scepticism about the case for green gilts unless investors were to pay a premium.
I would tend to disagree.
The market would, in time, set the level at which green gilts would trade but overseas experience shows that the same borrower, over the same duration, is unlikely to be able to expect to borrow more cheaply for one purpose than for another.
According to the Financial Times, green debt in France and Ireland trades roughly in line with those countries’ conventional bonds.
In the corporate bond market, one of the UK’s flagship ethical funds, the Threadneedle UK Social Bond Fund, tends to perform in line with conventional corporate bond funds.
I understand why a government might not wish its creditors to dictate how it spends the money that it borrows, albeit this makes it harder for some creditors to lend it money in good conscience.
However, issuing green gilts would do more than just earmark an element of government debt for socially or environmentally beneficial causes.
It would also, potentially, unleash a wave of green corporate bond issues that, lacking the benchmark a sovereign gilt issue would provide, have been slow to come to market.
This money could be used to fund private sector environmental initiatives with much longer time horizons than would usually be supported by the equity markets.
According to the Climate Bonds Initiative, sterling denominated green debt issued in the first half of 2019 totalled just £2bn.
This compared to global green bond issuance in the same period of €65bn.
British investors want to help provide long-term funding for socially and environmentally beneficial projects in both the public and private sectors.
The government, meanwhile, has committed the UK to achieving net zero carbon emissions in 30 years’ time and to banning the sale of new petrol and diesel cars in 15 years’ time.
From roadside charging infrastructure to renewable energy and retrofitting homes with efficient appliances, the level of long-term investment needed to achieve these commitments will be huge.
Green bonds are not just a way of salving ethical investors’ consciences, they are potentially the best way for this country to be able to live up to its word.
Peter Green is chief executive of Healthy investment
