The United Kingdom’s ESG financing has drawn renewed focus with a think-tank calling for the sovereign to explore issuing sustainability-linked bonds and the country’s Debt Management Office launching its first auction of green Gilts under its reduced 2022–23 target.
In its report, “Financial services and net-zero: Seizing the opportunity”, the Social Market Foundation made a case for the UK – a laggard on green bonds that entered the market after many other European economies – to “lead the charge on sustainability-linked bonds”.
SLBs tied to national net-zero targets serve two roles, it suggested. The first is the creation of “a commitment device” for government to decarbonise the country and the second is to support making the UK “a leading hub of sustainability-linked finance”.
Noting that Chile’s landmark SLB has already proved that the instrument can be effective for sovereigns as well as more usual corporate issuers, SMF said the UK should use it to demonstrate its commitment to net-zero emissions.
“If this government really wants to show that it is fully committed to decarbonisation, it should issue a sustainability-linked Gilt,” the SMF said. “The prospect of financial penalties for over-promising and under-delivering could prove a powerful way of holding the government true to its word on net zero.”
The UK could become the first G7 sovereign to issue an SLB as only Chile has so far used the instrument. However, the DMO has given little indication that it is open to SLBs, and its focus for green and conventional bonds is maximising liquidity.
Inaugural auction
On Tuesday the DMO added another £2.25bn to the UK’s debut green Gilt – the July 2033 bond launched shortly before the country hosted November’s COP26 international climate summit. Liquidity of the bond, which attracted £100bn of orders, has been “very poor, implying investors have continued to hold onto it”, according to RBC Capital Markets.
The auction was covered nearly 2.4 times with bids exceeding £5.34bn. The tail between the lowest and average yields on accepted bids was 1.6bp.
The offering’s modest size reflects the DMO’s reduced green bond programme this year. The UK plans to sell just £10bn of the product this year, compared with £16bn in its first year – though the agency pointed out that the green share of the overall Gilts programme remains largely unchanged at 8%.
The DMO expects to raise this year’s total through one auction of the July 2033 or July 2053 green Gilts per quarter.