Investment managers’ wishlist for green gilts

The Investment Association (IA) has outlined 10 key features it would like to see the UK government consider in the rollout of green gilts, which include methods to ensure proceeds are explicitly used for environmental and social benefit and use of an audit committee to ensure this due diligence is carried out.

As announced in November, chancellor Rishi Sunak confirmed in the March Budget the UK government will be issuing its first sovereign green bond – or green gilt – this summer, with a further issuance to follow later in 2021. Green gilt issuance for the 2021/22 financial year will total a minimum of £15bn. Budget documents said the green gilt framework will be published in June and will detail the types of expenditures that will be financed to help meet the government’s green objectives.

Ahead of this, the IA consulted its members and put together the paper Position on Green Gilts detailing how they should play a part in helping the UK meet its net-zero commitment by 2050.

See also: – Green gilts: A positive step on the UK’s path to net zero

The 10 key features are as follows:

1. Strict use of proceeds. The legal documentation for the green gilt should explicitly note how proceeds are being used to ensure financing is used only for projects aiming to achieve an environmental and social benefit. This would bring the green gilt in line with ICMA’s Green Bond Principles. IA members also said investments should be carried out on the basis of their compliance with the EU and UK Taxonomies for Sustainable Activities.
2. Forward looking. An optimal green gilt would be a long-term financing path for future projects. This presents an opportunity for the UK Treasury to challenge the market practice of using look-backs, in order to leave a lasting enhancement to the green bond market.
3. Medium to long dated. The project timelines in which bondholders are investing would ideally be linked to debt with similar maturity lengths. This would also allow investment managers, such as those managing pension funds, to meet their long-term liabilities.
4. Use of an audit committee. In line with the ICMA Green Bond Principles, the government should set out their sustainability objectives, the process for determining eligible projects, the eligibility criteria covering any exclusions and the process for environmental and social risk due diligence, the IA said. Scrutiny of this process should be carried out by an Audit Committee consisting of market representatives as well as representatives from within Government.
5. Social impact element. IA members support the integration of a social investment element into the green gilt, with proceeds being used to fund environmental projects with social co-benefits. This would play a part in ensuring UK is a world leader in social and environment financing. However, members also called for more clarity from the government on how the social element can be incorporated.
6. Mandatory verification. The IA expects verification of green gilts to be mandatory, in line with the requirements of market standards such as the Climate Bond Standard and proposed EU Green Bond Standard, the paper said.
7. Reporting. IA members request the government report annually, detailing the allocation details as well as the impact of the investment of green gilt proceeds, including performance against both qualitative and quantitative KPIs.
8. Continuous engagement. The IA said its members would like to have continuous discussions with the government to discussed the green gilt project progress.
9. Use of existing frameworks. The IA said: “Along with ICMA’s widely used Green and Social Bond Principles, the IA considers there is an opportunity for the green gilt to incorporate other widely understood existing frameworks to maximise investor take-up by ensuring broad international harmonisation as well as providing greater clarity as to the objectives of the green gilt.” For example, the government could consider the UN Sustainable Development Goals, the EU taxonomy, the Impact Management Project’s Impact Management Norms and as previously mentioned NDCs, determined as part of the UN Paris Agreement on climate change.
10. Equivalent features with conventional gilts. For example, green gilts should be issued in inflation-linked and fixed income formats, and be eligible for inclusion within the range of UK government bond benchmark indices, particularly the FTSE indices, which the paper said “is vital to ensure maximum investor take-up”. Furthermore, they should be eligible for use as collateral for derivatives, and as a deliverable bond on long gilt futures.

Galina Dimitrova, director for investments and capital markets at the IA, said: “The creation of a green gilt will bolster the UK’s credentials as a world leading green investment centre and demonstrate the government’s commitment to achieving the 2050 net zero target. The green gilt has the potential to provide much-needed investment into sustainable projects and businesses, while providing long-term returns for savers. We’re already seeing a strong level of demand from customers for responsible investment products and look forward to working with government and our members to turn the proposed green gilt into a reality.”

The IA said it welcomes further engagement on this topic from the government and other interested parties.

The government also commits to reporting the contributions of green gilt spending towards social benefits such as job creation and levelling up.”