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