Government to issue green bonds to finance low carbon future

Budget Day is well known for the ritual of the Chancellor of the Exchequer standing on the steps of Number 11 Downing Street with a red briefcase, but this year’s budget could be the greenest we’ve ever seen.

Compared to his predecessors, Chancellor of the Exchequer Rishi Sunak has had a busy year at Number 11 Downing Street. Hired to fill the role, after the sudden departure of Sajid Javid, Mr Sunak was tasked with the tricky job of writing up a budget with just a month to go, back in 2020.

Since then, he has contended with making sure the numbers add up, when it comes to the UK’s public finances, in the midst of the largest economic crisis in a lifetime. Now, the Chancellor looks set to break records, by introducing the world’s first sovereign green bond during this year’s Spring 2021 Budget, allowing retail investors to buy into an entirely new asset class for financing green energy.

Green bonds for a brighter future

The government has already been issuing sovereign bonds, otherwise known as gilts, for years. By opting to finance its borrowings on the open markets, the government offers investors an opportunity to generate wealth by issuing such debt instruments. Gilts can be issued with a range of dates at which they mature, from as little as three months to 50 years from now, in the UK’s case.

Investors flock to gilts such as these, as they can often carry an attractive level of interest, which is paid out along with the original sum they invested in the bonds, upon the date of maturation. Green bonds already exist in the corporate world, but the UK Government’s actions, as laid out in November 2020, could take this asset class in a totally new direction.

This will be the first in a series of new issuances as we look to build out a green curve over the coming years helping to fund projects to tackle climate change … and create green jobs across this country

– Rishi Sunak, Chancellor of the Exchequer, UK

Sovereign Green Bonds can be used by the government to raise the funds required to invest in the sorts of projects that will ultimately help the UK decarbonise its economy and much more, with a more incentivised approach. Such projects could mean newer and more energy-efficient infrastructure, more jobs and a lower carbon footprint, moving forward.

An expansive green finance universe

Finance plays a significant role in helping governments and businesses alike on the path to achieving net-zero carbon emissions by 2050. We have seen the role pressure groups have played in convincing banks and insurance companies to limit their support for projects such as coal mining.

Swedish bank SEB estimated that we could see $500 billion of issuance in green bonds this year, with the total green bond market estimated to already be worth $1 trillion since its inception. As projects funded by green bonds take off and become viable, the demand for these instruments could surge, creating a virtuous circle of green investment which becomes self-sustaining. Not only could they become financially attractive, but we may start to see the impact of this savvy investment in the state of our environment.

By 2021, SEB estimates that more than $1 trillion could be raised in broader sustainable-related financing, through the likes of sustainable loans, added to the sums generated through the new green bonds being issued worldwide.
Money might not be the solution to all our problems, but when invested in a sensible way, it could serve as the means to bring about the outcomes we’re looking for.

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