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A Green Bond revolution

As the UK government announces its plan to issue its first green bond, we explain what they are and look at what investors need to know

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Joseph Hill
Investment Analyst

Published on 19 January 2021

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

The market for green bonds has been growing quickly. Last year around £190bn worth of green bonds were sold globally – they made up 3.5% of all the bonds issued.

In November, Chancellor of the Exchequer Rishi Sunak announced the UK will issue its first sovereign green bond in 2021. This marks a big step forward in developing green markets in the UK.

What are green bonds?

Just like a normal bond, green bonds can be issued by companies or governments looking to borrow money. The idea of a green bond is to raise money for projects that benefit the environment, and to help create a more sustainable economy.

Green bonds can be used for lots of different things. As this will be a government issued bond, its focus could be on improving green infrastructure or creating new jobs in generating renewable energy. Alternatively if it were a real estate company issuing a green bond for example, then the money the bond raised could be used to build more energy efficient houses.

Issuing green bonds can sometimes mean higher costs for the company or government issuing the bond though. They’ll need to track, monitor and report on how the money they’ve borrowed is being used. This is so investors can make sure the money they’ve lent is being used for what they hoped it would be.

While the government haven’t yet said exactly what they’ll be using them for, the Treasury’s committed to creating a list of green activities that match their long-term climate targets. This will make sure the money raised by the bond is used in the right way by the government.

This should give confidence to investors and could open up the UK to investment from a broader range of ESG minded investors around the world.

What’s the UK government trying to achieve?

The UK government’s trying to reduce the country’s carbon emissions as part of the Paris agreement. This was signed in 2016 to stop global temperatures rising more than 2°C compared to pre-industrial levels. The agreement is global, with almost 200 other countries signing it. Their job is to co-ordinate and support each other to reduce carbon emissions, and limit irreversible damage to the environment.

As a result the UK has committed to achieving the following emissions targets to reduce the impact of climate change:

UK Government Target	Deadline
Reduce all emissions by 68% from levels in 1990	2030
Achieve a net-zero carbon economy	2050

These ambitious targets require action and real changes in the way different sectors operate. Some sectors have made more progress than others though in reducing their carbon footprint.

Between 2008 and 2018, the energy sector reduced greenhouse gas emissions by 62%, and the waste sector also cut emissions by 46%. These were the most productive sectors, which has contributed to overall greenhouse gas emissions being 45% lower in 2019 than they were in 1990.

UK greenhouse gas emissions by sector (2018)

Source: Department for Business, Energy & Industrial Strategy. Figures may not add up due to rounding.

In November the UK will host the 26th UN Climate Change Conference in Glasgow. This is a big opportunity for the UK to lead the way, bringing together heads of state, climate experts and campaigners to agree to take action against climate change.

Why should we be aiming for a more sustainable economy?

It’s all about improving the quality of the economy. Growing populations, longer life expectancies and higher consumption have all increased the pressure on our planet’s natural resources.

You could pick out a number of environmental harms that negatively affect our daily lives. Air pollution from inefficient transport alone damages ecosystems and biodiversity and harms our health.

It’s also about waste. Poor waste management contributes to lots of environmental problems. The most obvious is probably the methane released from landfills. But there are much wider impacts. How much of this ends up in oceans interfering with the species that live there?

Waste is also closely linked to our consumption – if there are more of us on the planet, we’re likely to consume more. But when recycled materials replace new ones, fewer new materials need to be used in the first place. A much more sustainable cycle.

Green bonds have a role to play in bringing a range of positive social benefits like creating new green jobs, and revitalising regions.

A sustainable economy isn’t at the expense of human wellbeing, it’s what’s needed to support it and green bonds have a role to play in getting us there.

Green bonds can be a great way to invest according to your principles, lending money to companies or governments trying to create a greener future. Remember though, all investments fall as well as rise in value, so you could get back less than you invest.

While the government have announced the arrival of green bonds in 2021, they haven’t given us any set dates yet. If you want to keep up to date with the latest investment stories make sure you sign up to our weekly Editor’s choice email. Every Saturday morning we’ll send the week’s top insights.

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