At Face to Face, we’re serious about our sustainable portfolios. We understand that ESG (Environmental, Social and Governance) funds are a priority for many investors, with demand only set to increase. Because of this, we were excited to read Rishi Sunak’s announcement towards the end of 2020 that the UK government would be launching a green bond, otherwise known as a green gilt, in 2021. In this article, we’ll dig into what a green government bond is and what it might mean for investors.
What are green bonds?
Green bonds are functionally very similar to other sovereign bonds, which governments regularly issue and sell to investors. The real difference is that the government will use the money raised by the bonds to exclusively fund projects that tackle climate change, build infrastructure and create “green jobs” across the country.
The exact details of how the money raised by the bonds will be used are yet to be announced. The Chancellor announced these bonds in November 2020 but said that they would be launched in 2021 – so we may be waiting for several months to hear any more.
There are a few potential sticking points around these green bonds that will affect how desirable they end up being. Firstly, we will obviously need to wait and see precisely how “green” these bonds actually end up being, which will only come out in the details of the projects that they’ll be used to fund.
Secondly, the Chancellor also announced a so-called “green taxonomy” for the UK, which would be used to classify how green other investments are. The details of this may affect demand for the bonds themselves, as we are able to better classify other green investments and understand how they fit into wider ESG investing.
We are also yet to hear any details on the size of the bonds and their maturity length, which will obviously affect the total size of the investment offered and therefore the supply.
What does the UK green bond mean for investors?
Conventional bonds are an attractive investment option for many investors, and so we would expect the new green bond to be a very attractive proposition for specifically ESG funds as well as those looking to add a relatively low-risk green option to their portfolio.
Other green bonds issued by European countries have been extremely popular, and the amount of money heading into ESG funds is growing quickly. This means that demand for these bonds is likely to be extremely high. The Chancellor may have a difficult job forecasting the exact size of the issuance – with demand as high as it may be, too small an issuance would be a massive wasted opportunity. Conversely, too large of an issuance could cool the market as supply outstrips demand.
It’s difficult to make any predictions at all with so few details about the bonds themselves. We would expect interest and demand to be high, and that’s always a recipe that has the potential to create price volatility. It may be worth waiting for prices to settle after launch before buying the bond for a long-term hold.
Will the green bond launch in 2021?
Of course, the other question around the UK’s green bond is whether it will actually launch in 2021 as promised. With Covid-19 continuing to cause huge disruption for the country’s economy and financial sector, it’s entirely possible that the launch of the bond may be postponed. However, Rishi Sunak is likely to want to use investment opportunities like these to kick-start the post-Brexit and post-coronavirus economy, so it seems that he would want to protect the launch of these bonds as much as possible.
As with a lot of things at the moment, it seems we may just have to wait and see. We’ll keep you posted right here on the Face to Face Finance blog.