The analysis Insight provided for the first two issuances of green gilts by the UK government has sparked a great deal of interest from pension funds and consultants.
We offer our thoughts on some of the frequently asked questions we have received on green gilts below.
To recap, the government raised c.£10bn via a syndication of the first green gilt on 21 September 2021, and c.£6bn in a second issuance (also a syndication) on 21 October 2021.
What did each green gilt syndication look like?
|First green gilt||Second green gilt|
|Issuance date||21 September 2021||21 October 2021|
|Gilt name||0⅞% Green Gilt 2033||1½% Green Gilt 2053|
|Amount sold (by value)||c.£10bn||c.£6bn|
|Investor demand (by value)||c.£100bn||c.£74bn|
|Issue price / yield||£100.033p / 0.8721%||£102.214p / 1.4133%|
|Pricing difference or 'greenium'||Issued at a yield c.1.5bp lower than fair value||
Issued at a yield c.2bp lower than fair value
What has happened to the greenium for both green gilts since they were issued?
The ‘greenium’ is the green bond pricing premium above similar maturity non-green gilts. The greenium for both gilts has risen since issuance, so investors will have seen an increase in the gilts' relative value since purchase. The 12-year gilt issued on 22 September 2021 has seen its greenium rise from c.1.5bp at issuance to c.8bp by mid-November, while the 32-year gilt has seen its greenium rise from c.2bp at issuance to c.5bp by mid-November.
Both syndications were heavily oversubscribed, with investor demand 10 times or more than the amount issued. The Treasury confirmed earlier this month that it would issue no more green gilts before the end of the 2021-22 tax year.
Did Insight buy any green gilts for LDI portfolios?
We bought green gilts for clients who have given us discretionary liability-driven investment (LDI) mandates. While the gilts offered a lower yield than similar maturity non-green gilts, we saw how the greenium on green bonds issued by European governments had risen after issuance from around 1.5-2bp to around 6bp on average. In other words, the primary issuance point has typically provided a cheap entry point for green bonds that end up trading more expensive on the secondary market.
What does this mean for fiduciary responsibility?
There have been questions regarding whether pension scheme trustees should invest in green gilts. The argument against doing so is that pension scheme trustees’ fiduciary duty is to ensure they are achieving strong risk-adjusted returns in order to meet member benefit payments. The greenium means that green issuance is slightly more expensive than non-green gilts of a similar maturity.
However, while green gilts might trade at a premium relative to similar maturity non-green gilts when they are issued, so far green gilts have become even more expensive as demand for green gilts increases, representing a good investment opportunity for pension schemes. Furthermore, as part of trustees’ fiduciary duty, they are required to explicitly consider and manage ESG risks, including climate change. The UK government has already suggested that the rationale for issuing green gilts is linked with supporting the UK with transitioning to a low carbon economy. This means there is a potential argument for pension schemes to invest in green gilts as a way of demonstrating the management and mitigation of climate risks through the projects that are being financed.
What volume of issuance of green gilts should we expect in the future?
The £16bn of green gilt issuance in 2021 represented c.8% of all gilt issuance (£200bn in total). We are expecting a similar volume of green gilt issuance in fiscal year 2022/2023.
What is the expectation that the UK government will build out the yield curve for green gilt issuance?
Our expectation is that the Treasury is more likely to add more issuance to the existing 12- and 32-year maturity gilts initially, then build out the yield curve. This will increase liquidity in the market for the 12- and 32-year maturity gilts already issued. If the Treasury does issue a new maturity, we would expect it at the shorter end of the curve.
What is Insight's view on the UK government's framework for financing environment related projects through issuing gilts?
The UK government published its Green Financing Framework in June 2021 showing how it will finance environment-related expenditures through issuing gilts. The framework explains the “basis for identification, selection, verification and reporting of the green projects” eligible for financing from the proceeds of these new issues. It fully meets Insight’s minimum expectations for new impact bond issuance, achieving a green rating according to our traffic-light system, although there remains room for improvement on some aspects including definitions of eligible projects and the inclusion of tax breaks for some green financing. Strengths include lists of eligible – and excluded – projects that focus on suitable uses of proceeds, clear alignment with several Sustainable Development Goals (SDGs), and best practice with regard to a maximum limit on using proceeds for refinancing.
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Your questions answered on green gilts