After analysing the UK’s green landscape in our first two “Virtual World Tour” articles about the country, we’ll now be looking at the UK’s green debt market – a market, which got off to a somewhat slow start but now has all stars aligned for a considerable and longer lasting growth spurt.

Looking at volumes over the past five years, it’s fair to say that the green Sterling market hasn’t really taken off yet: between 2014 and 2019, total Green Bond volume in Sterling reached £12.5 billion, the 7th largest issuance volume globally for that period - representing less than half of the 4th ranked Swedish Krona market[1]. Despite the COVID-19 pandemic, 2020 didn’t look much different, Green Bonds issuance globally jumped 9% year on year to a record $290 billion[2], with the US, the EU and China collectively taking an 82% market share[3], while the Sterling market didn’t feature in the top 5.

While this might come as a surprise, considering the UK has gained a reputation as a frontrunner on climate action and the government has repeatedly declared its intention for the UK to become “a world leader in the use of green finance”[4], there are three main reasons why the country has been slow off the green mark. Firstly, domestic Supranationals and Agencies are to a large part behind the Green Bond volumes in the biggest markets, the US and Europe, where they are headquartered, while the UK isn’t the home market for any big, debt issuing Agency, which significantly reduces the potential for high-volume green Sterling issuances.

Secondly, and most importantly, the UK’s HM Treasury has yet to issue its first green gilt. Sovereign issuances, all of significant volume by nature, have underpinned figures in other markets. However, in March this year the UK took a significant step towards joining the ranks of sovereign Green Bonds issuers with the announcement that the new budget includes the issuance of at least £15 billion of Green Gilt during this financial year.

The underlying Green Gilt Framework is scheduled for publication in June, paving the way for the first Green Gilt in the summer. This move had been tensely awaited by many industry organisations lobbying for years for the UK to follow the example of green sovereign issuances in other countries, which all have shown to kick start their broader domestic green finance markets; examples include France, the Netherlands, Ireland and Belgium. Hence there’s great optimism that a green debut this year will send a powerful signal to investors and issuers and help position London as a green finance hub.

Thirdly, looking at corporate issuers of Green Bonds, based on use of proceeds, companies in the energy sector and the building sector are dominating the markets globally[5]. Considering that out of the top 6 UK energy firms three are owned by European utilities – E.ON, EDF Energy and Scottish Power, whose parent companies have all issued green debt – the appetite for green Sterling issuances is limited. Meanwhile, contrary to the building sectors in other countries that have quickly warmed to the opportunities that Green Bonds offer, UK real estate firms have proven to be less convinced that green debt comes with a better price and therefore have been more reluctant to pay the administrative costs for the comprehensive preparations required before issuing sustainable debt[6].

Still, the Sterling market is turning green, and over the past years has seen a number of historical green transactions: In 2014, Unilever opened up the Sterling Green Bonds market with a 4 year, £250m issuance to finance green projects for its manufacturing plants[7], while in August 2017 Anglian Water made history by becoming the UK’s first public utility to launch a Sterling Green Bond[8]. And, in 2018, the International Finance Corporation, a member of the World Bank Group and one of the world’s largest financiers of climate-smart projects in developing countries, issued its debut Sterling Green Bond[9].

Headline making green issuances continued in the fourth quarter of 2019, which brought a peak in Sterling-denominated Green Bonds in the Sovereign, Supranational and Agency (SSA) domain: the European Investment Bank issued the largest Sterling Green Bond with a volume of £800 million, topping German state-owned development bank KfW’s £650 million Green Bond from July 2019[10]. In the same year, Scottish energy company SSE became the largest UK corporate Green Bonds issuer with their debut £350 million Green Bond[11].

In 2020, the Sterling market as well as British corporates celebrated further green ‘firsts’:

• Northern Powergrid’s ultra-long £300 million 42 years debut Green Bond. With this transaction the company became the first electricity distribution network operator (DNO) in the UK to issue green debt.[12]
• Cadent Gas’ Euro 500 million 12 years Transition Bond based on its Transition Bond Framework, the first UK corporate to publish such a framework[13],
• National Grid’s debut Green Bond in the Euro-market raising EUR500 million, followed by the UK company’s first Green Bonds in the US a few months later[14], and
• Tritax’s debut Sterling Green Bond, the first from a UK Real Estate Investment Trust (REIT)[15].

2021 has already seen significant activity, with ‘first adopters’ now following the green fixed income pioneers in the Sterling market: Whitbread, the largest hotel operator in the UK, launched a dual tranche Sterling Green Bond in February[16], while Workspace Group, the UK office space company, opted for a Sterling Green Bond as its debut in the fixed income market, sending an important signal that the real estate sector, responsible for around 40% of the global carbon footprint, is increasingly committing to sustainability[17].

Furthermore, Dutch bank ING tapped into the Sterling market in February, offering much wanted green supply to UK investors with it an £800 million 6-year Green Senior HoldCo (Holding Company) Green Bond[18].

The UK’s Green Finance market, despite some headline making transactions over the year, has so far only managed lacklustre growth compared to other European markets.

While issuers know that UK funds and other UK investors have a large appetite for this kind of debt and for responsible investments overall – responsible investment funds under management now total over £56 billion in the UK, growing 66% over the past 12 months, in comparison to 7% across funds overall[19] – and while the UK government is putting considerable effort into positioning the UK as a sustainable finance leader, it seems that everyone is waiting for the UK’s debut sovereign Green Bond to deliver this final stamp of approval for sustainable Sterling that could finally ignite the market.

If this deal proves to be successful, and there’s no reason to doubt that British investors wouldn’t gobble up the Green Gilt after they were the second-largest buyers of the world’s first sovereign Green Bond, buying 16% of the Polish issuance in 2016, and were also the second-largest buyer of the Dutch sovereign Green Bond, and the third-largest buyer of the French equivalent, it would send a strong message to corporate issuers that there is indeed considerable demand for Sterling denominated sustainable debt.

However, a look at the bond markets alone, of course, can only say that much about whether and how the UK’s busy green agenda has translated into high-volume green debt activity. While green debt is very much a public market phenomenon, it can be a ‘private affair’, too.

Green loans, for example, made up nearly 11% of the $732 billion global sustainable debt volume in 2020[20]. Specifically, the Loan Market Association’s publication of the Green Loan Principles (GLPs) in December 2018 helped green loans to reach a peak at $93.4 billion in 2019. The GLPs are closely modelled on the Green Bond Principles (GBPs), promoting the same type of transparency in project selection, fund allocation and reporting[21]. 

Also, the green Private Placements (PP) segment is steadily evolving and playing an important role in the carbon transition across the debt capital markets, not only for smaller firms which can’t access the public bonds markets due to their size, but also for large corporates which see the PP market as a cleaner alternative for green debt issuance.

While PP make up only around 9% of all sustainability-labelled debt, the vast majority of which has been issued in the MTN market[22], a growing number of issuers either add private placements to their green bonds or go with a green PP at particular points along the curve in response to investors’ demand. 

With green investors facing difficulties to find suitable investment opportunities in the public markets, where only 1% of outstanding debt has a sustainability label (source: Dealogic), PPs can offer a highly attractive alternative: Not only do green PPs have a more direct link to a particular green project in the use of proceeds – compared to the larger portfolios of green projects for a green bonds – they also allow investors through the due diligence and credit review to properly assess the sustainability-link of a prospective issuance. At the same time, green issuers appreciate the fact that advisory costs for PPs are significantly lower and the whole process can often be completed much more quickly compared to Green Bonds in the public sphere.

Prominent green PPs in the UK have included Thames Water’s £706 million PP in 2018 and South East Water’s £175 million PP in 2019, while in its neighbouring country Irish building materials company Kingspan agreed the largest corporate green Private Placement, a EUR 750 million note, in 2020[23].

The debt ‘greenification’ has also reached traditional financing instruments such as Project/Infrastructure financing. While often overlooked, experts estimate that over the last three years, green infrastructure-debt opportunities have made up around a third of the global infrastructure-debt market[24] – a trend reflected in the UK, which has seen high profile projects such as Dogger Bank, the world’s largest offshore wind farm located in the UK, receiving project financing rather than its owners tapping into the capital markets[25].

With the launch of the UK’s new Infrastructure Bank (UKIB) – equipped with £22 billion of financial capacity to deliver on its objectives, consisting of £12 billion of equity and debt capital and the ability to issue £10 billion of guarantees[26] – green infrastructure financing will see a boost, providing lending volume in addition to the billions the UK’s financial services sector is already providing.

Finally, let’s not forget that grants play a crucial role in the UK’s transition to a net zero carbon economy. Provided by local authorities and government departments such as the Department of Energy and Climate Change (DECC) and the Department for Environmental, Food and Rural Affairs (DEFRA) as well as by other organisations (for example the Carbon Trust), SMEs and start-ups particularly benefit from environmental grants, which aim to support research into low-carbon technologies as well as specific transition projects. Some recent examples include:

• The Public Sector Decarbonisation Scheme, for example, delivers £1 billion in grants as part of the UK Chancellor’s ‘Plan for Jobs 2020’ commitment to support the UK’s economic recovery fromCOVID-19, supporting up to 30,000 jobs in the low carbon and energy efficiency sectors[27].
• The £40 million Green Recovery Challenge Fund, part of the government’s wider green economic recovery, jobs and skills package, brings forward funding for environmental charities and their partners to start work on projects across England to restore nature and tackle climate change, with grants from £50k to £5 million available[28].
• The National Lottery Community Fund awarded over £19.5 million in grants to help tackle the climate emergency across the UK in the last four months of 2020[29].
• Between January to March 2021, more than 20 new environmental grants schemes have been launched in the UK, many by the private sector[30]; double the amount compared to the whole of 2020.

Notes

[1] Climate Bonds | Green bonds: Global state of the market 2019 (PDF)

[2], [3] Climate Bonds | Sustainable debt: Global state of the market 2020 (PDF)

[4] Sky News: A world leader in green finance: Chancellor eyes City role in post-Brexit revival

[5] Climate Bonds Initiative: Green Bond Highlights 2019: Behind the Headline Numbers

[6] Financial Times: UK accused of spoiling the green bond party

[7] Global Capital: Unilever takes green bonds into new sphere, new pricing

[8] awg.com/sustainability/green-bonds/

[9] IFC Issues First Sterling Green Bond, Raising 350 million Pounds for Climate-Smart Solutions

[10] ICMA Group: Green, Social & Sustainability Bonds

[11] SSE: Third Annual Green Bond Report (PDF)

[12] Northern Powergrid: First distribution network operator to power its business investment plans under new green finance framework

[13] cadentgas.com/news-media/news/march-2020/cadent-issues-uk’s-first-transition-bond

[14] nationalgrid.com/uk/stories/grid-at-work/national-grid-launches-green-bond-fund-sustainability-projects

[15] propertyweek.com/finance/tritax-launches-first-sterling-green-bond-from-a-uk-reit/5111261.article

[16] ci.natwest.com/about-us/media/articles/whitbread-checks-into-gbp-market-in-style-with-debut-green-bonds/

[17] ifre.com/story/2765567/workspace-citycon-build-on-green-real-estate-growth-yfcxcdvyf4

[18] ci.natwest.com/about-us/media/articles/uk-investors-show-big-appetite-for-ing-groep-s-first-green-holdco-issuance-into-sterling-market/

[19] theia.org/media/press-releases/responsible-investment-funds-under-management-66-over-12-months

[20] bloomberg.com/news/articles/2021-01-14/the-sustainable-debt-market-is-all-grown-up

[21] Loan Markets Association: Green loan principles (PDF)

[22] ci.natwest.com/insights/articles/esg-market-embraces-benefits-of-private-placements/

[23] Irish Times: Kingspan agrees terms for €750m green private placing

[24] ipe.com/esg/private-and-green-non-listed-sustainable-debt/10044478.article

[25] ci.natwest.com/about-us/case-studies/dogger-bank-financing-for-the-world-s-largest-offshore-wind-farm-powers-transition-to-zero-carbon-uk-economy/

[26] HM Treasury: UK Infrastructure Bank | Policy Design (PDF)

[27] gov.uk/government/publications/public-sector-decarbonisation-scheme-psds

[28] gov.uk/government/news/governments-40-million-green-recovery-challenge-fund-opens-for-applications

[29] tnlcommunityfund.org.uk/news/press-releases/2020-12-01/almost-20-million-in-national-lottery-funding-to-support-uk-communities-to-tackle-climate-change

[30] grantsonline.org.uk/news/energy-environment-and-transport/