The UK’s inaugural “green gilt” sale was met with record demand on Tuesday, as the country belatedly joined a growing number of European governments that have sold bonds with proceeds earmarked for environmental spending.
Investors queued up to buy the new 12-year bond, placing more than £100bn of bids — the highest ever for a UK government bond sale — as the Treasury raised £10bn, according to bankers working on the deal.
The UK’s Debt Management Office, the arm of the Treasury that handles bond issuance, plans to sell at least £15bn of green gilts this year, with a further sale scheduled for next month, as it launches one of the world’s largest green borrowing programmes.
The money raised by the bonds must be spent on projects including flood defences, renewable energy, or carbon capture and storage, in line with the green financing framework published by the government in July.
The new bond, due to mature in July 2033, priced at a yield of about 0.9 per cent, putting it roughly in line with existing gilts of similar maturity.
The UK has arrived relatively late to the market for green sovereign debt, despite intense lobbying from a fund management industry anxious to demonstrate its commitment to environmental, social and governance-focused investing — known as ESG. Germany, France, Spain, Italy, Poland and Hungary are among European countries that have already sold green bonds.
“If you look at flows into ESG funds, they’re accelerating,” said Jim Leaviss, chief investment officer for public fixed income at M&G Investments. “There’s just been so much pent-up demand for this.”
DMO chief Robert Stheeman had expressed reservations about the idea, telling the Financial Times last year that unless investors were prepared to pay a premium for green gilts, they might end up being poor value for money for the UK taxpayer.
Since then, green bonds have generally begun to price at slightly lower yields than their conventional counterparts — for example in Germany’s first green bond sale a year ago — locking in a small saving for issuers.
UK chancellor Rishi Sunak announced plans to sell green gilts last year “to meet growing investor demand”. He also said green government debt could eventually become a pricing reference for companies that want to sell green bonds of their own.
Most investors expect green gilts will begin to command a price premium over conventional gilts at subsequent sales. But some fund managers are not convinced that cheaper borrowing costs on green debt will push governments to increase their environmentally-focused spending.
“You can’t blame the government for cashing in on all this demand for green issuance,” said Mark Dowding, chief investment officer at BlueBay Asset Management. “But there’s no suggestion this is funding things that weren’t already happening anyway. The government sets priorities for spending and taxation and then the issuance follows. I’m not sure putting a green label on part of it really changes much.”
The banks handling Tuesday’s sale were Citigroup, Barclays, BNP Paribas, Deutsche Bank, HSBC and JPMorgan Chase.