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The Responsible Banker - 2 November 2020

  • Published date: 02.11.2020
  • Category:

ARTICLE OF THE WEEK

Thirty financial institutions call for issuance of UK sovereign green bond

What’s happening? Axa, BlackRock and NatWest are among 30 financial institutions with collectively £10tn ($13tn) of assets under management, calling on the UK government to follow Sweden and Germany's lead and issue a green bond. The group said its Green+Gilt bond proposal would ensure adequate funding for renewable projects, meet demand for sustainable programmes from retail and institutional investors, and enhance the UK's environmental reputation ahead of COP26.

Why does this matter? This development arrives amind momentum building behind sovereign green bonds with Sweden and Germany both issuing such debt. Such issuances have been attracting strong demand amid Covid-19 recovery efforts.
 
The pair join other countries which already tapped into the green bond market well before the pandemic, including France (2017), Ireland (2018) and the first-ever sovereign green bond issuer, Poland (2016). Moving forward, Germany’s green bond issuance and further plans for 2-year, 5-year and 30-year green debt offerings could open the door for other countries like the UK to follow suit, by establishing a benchmark curve for other European nations and advanced markets to price themselves against.
 
Similar to the calls for the UK to issue a sovereign green bond, the European Commission also has an opportunity to do so to finance the green recovery. 
 
Beyond Europe, the Climate Bonds Initiative has seen significant expansion globally in the past year. In September, Mexico issued the world’s very first Sovereign Sustainable Development Goals (SDGs) Bond, aligned with the UN SDGs.
 
Meanwhile, there have been similar developments in Egypt, with the country debuting a sovereign green bond, which will contribute towards a $1.9bn portfolio of green initiatives, including renewable energy, reducing pollution and sustainable water management. Both these examples could avail from drawing on the experience of Fiji, the first emerging economy (and third country in the world) to join the sovereign green bond market. 
 
In light of Covid-19, with a fragile global economy, examples like Germany’s tie in to broader green recovery opportunities. With conventional German sovereign bonds already being considered a risk-free benchmark by virtue of their high credit rating, its new green sovereign bonds across varying maturities hold potential to create a similar benchmark in the green assets market.
 
Lateral thought – While there is promising scope for sovereign green bond issuance to expand globally, it is unlikely to be an entirely smooth-sailing process. Firstly, there are challenges from a legal perspective, with the absence of a common definition or legal framework across geographies. Secondly, another potential caveat could arise for sovereigns that are smaller issuers of green debt, in terms of liquidity
 
While Germany’s green bond issuance is “twinned” with an equivalent conventional bond – an attempt to address liquidity risks and enhance diversification – the sovereign green bond market is still relatively nascent, with a short-lived history dating back to Poland’s 2016 issuance. It will be important, therefore, to keep tabs of such risks.

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