Investors lined up to buy the new 12-year bond, placing more than £ 100 billion in offers – the highest on record for a sale of UK government bonds – according to bankers working on the deal . The £ 10 billion raised makes it the largest sovereign green bond ever.
The UK’s Debt Management Office, the branch of the Treasury that manages bond issuance, plans to sell at least £ 15bn of green gilts this year, with another sale slated for next month, as it is launching one of the largest green loan programs in the world.
The money raised by the bonds is to be spent on projects such as flood defense, renewable energy or carbon capture and storage, according to the green finance framework released by the government in July.
The new bond, which was due to mature in July 2033, was valued at a yield of 0.87%. The slightly higher price investors were willing to pay for the transaction meant that figure was 0.025 percentage points lower than the expected price for a typical conventional gilter, said Asif Sherani of HSBC, who worked on the transaction.
This ‘greenium’, which will save £ 28million to the Treasury over the life of the bond, is the largest ever for a sovereign green bond, Sherani said.
The UK entered the green sovereign debt market relatively late, despite intense lobbying from a fund management industry keen to demonstrate its commitment to environmental, social and governance-driven investment, known as ESG. Germany, France, Spain, Italy, Poland and Hungary are among the European countries that have already sold green bonds.
“If you look at the flows in ESG funds, they are accelerating,” said Jim Leaviss, investment manager for public fixed income at M&G Investments. “There has 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 are willing to pay a premium for green gilts, they could end up being d ‘poor value for money for the UK taxpayer.
Since then, green bonds have generally started to offer slightly lower yields than their conventional counterparts – for example, during the first sale of green bonds in Germany a year ago – generating a small saving for issuers.
“Until the value-for-money argument became clear, it made no sense for [the UK DMO] enter this market, ”said Sherani.
British Chancellor Rishi Sunak said the money raised would be used to fund “vital green government projects across the country”. He previously said green public debt could eventually become a price benchmark for companies looking to sell their own green bonds.
Despite the price premium commanded by green debt, some fund managers are not convinced that lower borrowing costs on such bonds will cause governments to increase their spending on the environment.
“You can’t blame the government for taking all this demand for green emissions,” said Mark Dowding, chief investment officer at BlueBay Asset Management. “But there’s nothing to suggest that this is funding things that weren’t already happening anyway. The government sets spending and tax priorities, and then issuance follows. I’m not sure putting a green tag on a part really changes that much. “
The banks handling Tuesday’s sale were Citigroup, Barclays, BNP Paribas, Deutsche Bank, HSBC and JPMorgan Chase.
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