Comment: Britannia, rule the green bond waves

Comment: Britannia, rule the green bond waves

Coverage of the UK's political scene is often limited to Brexit and the never-ending process of its implementation. Yet there are many other issues on the British government's agenda, including some fairly ambitious targets in terms of environmental transition. Bertrand Rocher considers the implications for green investing in the UK

This will undoubtedly be interpreted by some as the natural consequence of a desire to make London a global centre of green finance, at a time when the threats to its status are fuelling doubts. Whatever the hidden goals in favour of the City, if any, we can certainly expect results for the environment. In 2017 and then 2018, the team led by Theresa May put forward two plans - "the Clean Growth Strategy" and "A Green Future" - which have since been de facto adopted by Boris Johnson's cabinet.

Speaking before the House, Mr Johnson's allies have announced their intention to invest in projects based upon those plans and even create suitable institutions, by way of concrete gestures. In November, they added a £12bn "Ten Point Plan for a green industrial revolution" covering energy, transport, nature and technologies.

Once a framework for a green bond has been prepared and approved, displaying clear investment objectives on types of projects and assets decided and identified in advance, a government has little choice but to keep its word."

The plan notably aims at having offshore wind power capacity boosted to 40GW by 2030, i.e. four times the current level; most of the wind turbines will of course be located in Scotland and the North East. The government also wants to promote green hydrogen, and even contends it will "develop the first town heated entirely by hydrogen" by 2030.

Other points could be seen as more vague or classical, if not more controversial when it comes to nuclear being dubbed as a "clean energy source" as well as decarbonising jets or vessels, but put altogether, they might produce some results, at least in terms of CO2 emission savings.

Although the opposition and certain environmental groups criticise what they think is a considerable disparity between the prime minister's speeches and what constitutes realistic targets, particularly regarding the preservation of land and biodiversity or his desire to make the UK the "Saudi Arabia" of wind power, the fact remains that, going forward, his projects now have a funding component, and that should not be neglected. Indeed, the chancellor of the exchequer, Rishi Sunak, has announced that the UK's first Green Bond will be launched next year; in theory it will focus on clean and renewable energies.

While sceptics will see this as nothing more than a means of arranging a sort of financial endorsement to 10 Downing Street's green plans, it is actually a crucial step in setting the British state on the path to a more sustainable economy, probably to a greater extent than even Messrs. Johnson and Sunak have imagined. 

Of course, the leaders' real objectives might encompass the appropriation of environmental issues which have broad support across the national spectrum, as is illustrated by their communication on the positive impact they target for Wales, the Midlands, the Humber, Teesside, Merseyside, Grangemouth…, but launching such a sizeable green bond will place their environmental policy under the scrutiny of investors in addition to that of voters and workers.

Indeed, once a framework for a green bond has been prepared and approved, displaying clear investment objectives on types of projects and assets decided and identified in advance, a government has little choice but to keep its word. The British are certainly not shy of calling their leaders to account, but they will not always have access to the technical information which would allow them to follow the translation of the government's green investment plans into reality.

The future holders of the British green bond, on the other hand, will have the means to closely follow these data. The resulting pressure will inevitably have positive effects. For Mirova, the conversion of some of the world's most influential governments to green bonds, even with a hidden agenda, forces them to embark on the essential path of financing the environmental transition without looking back because they will have to translate that into tangible results.

Following the example of the Netherlands in 2019, and then Chile, Sweden and Hungary in 2020, Germany is the latest country to have taken the plunge in September, issuing its first green bond, for €6.5bn maturing in ten years, followed shortly afterwards by those of Daimler and Volkswagen, for €1bn and €2bn respectively.

With the UK's green bond, there is no doubt that this sector of the market will be engulfed by British corporate issuers, who are still apprehensive at present. As an example, in a green bond market that has surpassed the $1trn threshold this year, sterling-denominated green bonds represent no more than £15 billion.

The City, while waiting for this green gilt, may be able to content themselves with the Italian Republic's green bond: Giuseppe Conte's government has just announced that it was preparing to launch one very "soon". Rule Italia.

Bertrand Rocher is a portfolio manager and senior credit analyst at Mirova

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