There has been huge demand for the government’s first ‘green’ gilts, with £10bn sold to institutional investors.
A further £5 billion of UK green gilt issuance is expected this year, with NS&I also issuing a £15 billion green savings bond to retail investors in 2021. According to AJ Bell issuing the NS&I bond at a market leading rate could cost the taxpayer £210 billion a year.
AJ Bell head of investment analysis Laith Khalaf says: “The new guilt-free gilt has been a huge hit, with institutional investors jostling to get a slice of the action. Bonds are already in high demand, thanks to the presence of a price insensitive buyer in the form of the Bank of England, as well as regulations which encourage pension schemes and insurance companies to hold gilts.
“Add in a green tint which can help pension trustees bolster their ESG credentials, and you have a very potent sales mix indeed. The fact there’s also so little supply has also no doubt helped to put bums on seats. Just £15 billion of green gilts are planned this year, a drop in the ocean compared to the £250 billion of bonds the government intends to issue this fiscal year.”
Khalaf says: “The government will also be tapping up retail savers for green funds too, through the £15 billion issuance of the NS&I Green Savings bond, which will be a three year fixed term product. In theory there should be a good deal of demand for the NS&I bond, given its green credentials and Treasury backing. However, with cash rates so low, savers will be keen to make sure they’re getting a competitive rate, as well as satisfying their environmental concerns.
“That creates an uncomfortable friction for the Chancellor, between giving savers a decent rate, and providing value for money for the taxpayer. The best three year cash rates currently stand around 1.8 per cent, yet the government can borrow money on the conventional gilt market at under 0.4 per cent for three years, which it can then invest in green projects if it wishes.
“If NS&I issue their £15 billion green bond with a market leading rate of 1.8 per cent, that would cost the taxpayer around £210 million a year, at a time when Exchequer coffers have been drained by the costs of the pandemic. On the flip side, issuing a three-year bond at the gilt yield of 0.4 per cent is likely to see many savers turn a blind eye to the green savings bond when much more attractive rates are available on the market.”
AXA Investment Managers portfolio manager Mark Healy says: “We believe the deal is fairly priced for the inaugural green gilt issue and it appears to have generated strong investor interest judging by the size of the order book.
“The green issuance is in line with our climate framework and market standards. The eligible project categories are directly linked to the green strategy of the UK, with the issuer committing to publish all relevant output and impact KPIs, including those related to associated social co-benefits of green projects. Moreover, the green projects impact reporting has been developed in cooperation with external experts showing the time and resources that have been used to develop the gilt.”
The green gilt is part of the UK Government’s Green Financing framework and provides an environmentally friendly option to savers and investors as oppose to conventional gilts and NS&I accounts. The final price terms were +7.5bps against the 2032 gilt.
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