Comment

Gilt-edged solution to UK’s climate change mission

Green bonds can help build the Government’s infrastructure revolution and preserve the planet

Margaret Thatcher helped define the mission on climate change when she said: “Global warming is real enough for us to make changes so that we do not live at the expense of future generations.” While debt normally lets us live at the expense of tomorrow, issuing green gilts will allow us to invest in our planet’s health – and future generations will need it.

As well as an environmental crisis, we face an unprecedented public health crisis, placing a huge toll on the UK economy. Many businesses are suffering despite the extensive government support offered. Billions in loans, furlough and other schemes have let us survive the crash, but now we need to thrive in the recovery.

The environment is not a separate problem to the economy, but an opportunity to invest and level up. It is a chance for the Chancellor to reframe our economy to meet the long-term needs of our people and the planet.

A renewed focus on capital investment will be critical. The planned “infrastructure revolution” outlined in the March Budget must go ahead, as must the wider “levelling up” agenda. But let’s make it a green infrastructure revolution, and level up to create new green jobs. The UK Government should issue a sovereign green gilt to fund capital investment in infrastructure, creating new jobs, technology and transport.

A conventional “gilt’” or bond is simply a loan made to the government. Green bonds are different in that they ring-fence funding for green projects. Issuing green bonds could be the tonic for all our ills – it will fight climate change, it will raise capital to invest in infrastructure, jobs and our economy and it might also lower the cost of our debt.

The capital raised from green gilts could help fund manifesto commitments including £1bn for electric vehicle charging stations, £800m for carbon capture, £350m on cycling infrastructure and the £640m nature for climate fund that will support planting 30m trees a year.

But it would also allow us to invest in nuclear power and low-carbon transport. France recently announced €30bn (£27bn) of green spending as part of a comprehensive green recovery plan. This includes €9bn on the development of the hydrogen industry and new green technology. Much of this will come from green bonds. Britain is the world’s leading financial centre, yet we are surprisingly behind the curve when it comes to utilising capital markets to finance green growth.

Other countries have already seen the benefits of green bonds. The Netherlands, France, Poland, Ireland, Sweden, Belgium and Germany have all issued a sovereign green bond. Currently there is $1 trillion (£772bn) of green bonds in circulation. These saw oversubscribed demand from investors.

Despite not having our own government green bonds, UK investors are very active in the global green bond market. Some 28pc of money raised by French green bonds came from British investors. Yet, only 2pc of the world’s outstanding green debt is denominated in sterling whilst over 40pc is denominated in euros.

Why has the British government so far held back on a green gilt? Well, it is partly down to concerns expressed by the Debt Management Office, which oversees gilt issues, about whether a green gilt will be more expensive to issue.

But if we look at the other sovereign green bonds on the market, they either trade at yields equal to or even slightly lower than their non-green peers. This means they might even reduce the cost of borrowing for governments.

In September, Germany made a twin issuance of green and conventional bonds. The green bonds traded with a lower yield. And even if investors lost interest in Germany’s green bonds, they can swap them for conventional bonds with the central bank – ensuring green bonds could never be priced lower than conventional bonds.

The only real additional cost will be in the reporting on the use of proceeds, but these will be far outweighed by the benefits from the investment raised for our country’s infrastructure. In any case, solid reporting on the environmental effects of our green investment should be implemented, with or without green gilts.

Finally, in addition to being a cost-effective way of fighting climate change, growing our economy and building jobs, green gilts would help position Britain as a future green finance leader, proof that the Government and the City of London can innovate, adapt and evolve to meet future needs.

Green gilts are an easy, tried and tested, solution to both levelling up and fighting climate change. With green gilts as a policy, we have no excuse not to honour Margaret Thatcher’s words. Let us show the future that this generation did not live at the expense of theirs.

Gareth Davies is the Conservative MP for Stamford and Grantham. This is an edited version of his contribution to a collection of essays on Green Finance published by the Social Market Foundation and the Chartered Banker Institute.