In order to reach its target of net zero emissions by 2050, the UK government published a 10-point ‘green industrial revolution’ plan1. As part of this, the government raised c.£10bn via a syndication of the first green gilt on 21 September 2021, with the next green gilt issuance planned for the week commencing 18 October 2021. The green financing framework, published on 30 June 2021, details how the proceeds from green gilt issuance will be used, monitored and reported.
Results of the green gilt syndication
The table below sets out high level information in relation to the inaugural sale of a green gilt:
|Issuance date||21 September 2021|
|Gilt name||0⅞% Green Gilt 2033|
|Amount sold (£bn value)||c.£10bn|
|Investor demand (£bn value)||c.£100bn|
|Issue price / yield||£100.033p / 0.8721%|
|Yield relative to nearest gilt||UKT 4.25% 2032 +7.5bp|
The 0⅞% coupon 2033 green gilt was issued with a 7.5bp higher yield than the 4.25% coupon 2032 non-green gilt, however the latter’s much higher coupon means that this 7.5bp ‘yield pick-up’ is slightly misleading. Adjusting for the coupon difference, the market estimated that UKT 4.25% 2032 +9bp would have been reflective of the green gilt being issued at around the same price as a non-green gilt. As a result, the green gilt was issued at a c.1.5bp lower yield (premium or 'greenium') relative to this fair value level.
Trades executed since suggest the greenium has widened by a further c.4bp in the secondary market. Comparatively, French and German green bonds trade with a c.4-5bp greenium.
What to expect next
The Debt Management Office (DMO) will issue a second green gilt with a coupon of 1.5% and a maturity date of 31st July 2053. The size and pricing is subject to demand and trading conditions. With issuance for the 2021-2022 financial year expected to total at least £15bn for green gilts, a £5bn issue size, or larger, is expected by the market.
The UK government has committed to building out a green curve and is likely to increase the amount of green gilts issued in upcoming years if there is sufficient market interest.
In Europe, meanwhile, the European Commission has announced plans for the issuance of up to €250bn of green bonds in the next five years. They will likely proceed with this new issuance in October 2021, subject to market conditions.2
Ensuring proceeds will be used correctly
The recently published green financing framework outlines how the UK government intends to finance environment-related expenditures through the issuance of green gilts. The framework details how potential projects will be identified and selected, and how the proceeds and impacts will be verified and reported.
Projects must fall into one of six eligible expenditure categories (developed in line with ICMA Green Bond Principles). These categories align with, and contribute towards, multiple United Nations Sustainable Development Goals (UN SDGs), and are further strengthened by an exclusion list intended to preclude any inappropriate or controversial projects, e.g. nuclear power.
Selection and evaluation of projects is governed by the Inter-Departmental Green Bond Board (IDGBB) and chaired by HM Treasury. Annual evaluation will consider alignment with the eligible expenditure categories and with international standards. The government is currently developing a UK taxonomy of environmentally sustainable economic activities which will also be used in this area, further strengthening the selection process.
The timing and way in which proceeds are used is also restricted. Proceeds must be used to finance expenditures that occurred no more than 12 months before issuance and no later than two budget years after issuance. At least 50% of proceeds should be used for current and future projects, restricting the extent to which this 12-month lookback period for refinancing existing projects can be used.
The framework commits to providing separate reports covering proceed allocation (annually) and impact (at least biennially). The impact report will consider environmental impacts together with social co-benefits, including case studies where feasible.
Although there remain areas for improvement and future engagement, we have ranked the UK’s green sovereign framework as the strongest yet, with a GREEN ranking.
Responsible investment, Fixed income
Responsible investment in fixed income
Monitoring corporate climate risk
Putting principles into practice: responsible investment annual report 2021