The UK will launch its first sovereign green savings bonds, offering retail investors the chance to buy into projects dedicated to greening the economy, such as renewable energy schemes, in its budget this week.
A savings bond of an as-yet undetermined size and structure will be offered this year through National Savings & Investments, the government-backed savings scheme, the Treasury will announce.
There was a lack of detail about the move, which is part of the government’s effort to burnish its green credentials ahead of hosting the international climate summit in November, known as COP26.
Prime Minister Boris Johnson set out a 10-point plan for greening the economy last year, which the Treasury has pledged £12bn to support. The plan was criticised by climate experts as being a “far cry” from what is needed to get the country on track for net zero emissions by 2050.
The rules governing the green savings bond — such as how the money raised can be spent and how the government will report on spending and impact — will be based on the UK’s sovereign green bond framework, which has not yet been finalised. The framework will also govern the UK’s inaugural green gilt that is expected to be sold this year.
Bonds labelled as sustainable have exploded in popularity in recent months, with governments and companies expected to issue $500bn in green debt in 2021, according to research from Swedish bank SEB.
The categories of green bonds, green loans, social bonds, sustainability bonds are determined by the use of the proceeds. The International Capital Market Association and Loan Market Association provide guidelines.
More than $250bn was issued in sustainable debt in the first half of 2020, compared with $341bn for the whole of 2019, according to the Climate Bonds Initiative. While green bonds remained the most popular, demand for social and sustainability bonds rose last year as issuers earmarked the money for Covid-19 response measures.
However, the UK has been slow in coming to the sovereign green debt market. France sold its first sovereign green bond in 2017, while Germany, Poland and Ireland have all issued their own, and Italy set out its framework for doing so last week.
Mitch Reznick, head of sustainable fixed income at Federated Hermes, said the UK government would “unequivocally” want to issue the first green gilts before COP26.
“Green gilts will be sold into a pretty friendly environment,” he said, but added that investors generally did not want to pay too much of a premium for a green sovereign bond relative to standard government debt.
The Treasury said the funds from the savings bond would be earmarked for schemes to help the UK “build back greener” and meet its target of net zero greenhouse gases by 2050, such as renewable energy projects.
NS&I offers products such as premium bonds, which do not generate interest but offer investors the chance to win tax-free cash prizes of between £25 and £1m. Whether the green savings bond will follow this structure has not yet been finalised.
Separately, the chancellor would launch three competitions to develop new technologies to help meet the net zero goal, the Treasury said. This included a £20m competition to develop floating offshore wind projects; £70m to design a system to store excess low-carbon energy; and £4m to find ways of boosting clean energy crops and forestry.