Green gilts need to be medium-dated and explicitly show how their proceeds will be used if they are to be eligible assets for investment managers, according to a paper issued by the Investment Association.
In order to tackle climate change, fund infrastructure and create green jobs, the government has committed to launching the UK’s first sovereign green gilt in 2021.
As the funds industry looks to help play its part help the meet it net-zero commitment by 2050, the Investment Association has now set out a number of features its member firms want to see in these bonds to be viable for investment managers while also allowing the government to finance the environmental and social needs of the UK.
Tick the boxes
To provide certainty to investors, while ensuring funding for key environmental projects with social co-benefits are met, the Investment Association’s position paper stated that of the key features of green gilts needs to be legal documentation to explicitly note how proceeds of the bond are being used.
This, the Investment Association said, would bring the Green Gilt in line with the ICMA’s Green Bond Principles.
It set out 10 key features the industry wants to see as part of a green gilt, which also include the need for them to be forward looking, to provide a long-term financing plan for future projects and be medium-to-long dated to match the likely timelines of the projects they will be investing in.
“This would also allow investment managers, such as those managing pension funds, to meet their long-term liabilities,” the Investment Association paper stated. “This will in turn ensure that Green Gilts can finance vital environmental and social projects, while also helping the UK’s citizens meet their long-term investment needs.”
Demand is already there
Other features stated in the paper included the use of an audit committee, continuous engagement, mandatory verification, reporting and the integration of a social investment element into the green gilt.
Green gilts also need to have equivalent features to conventional gilts, meaning they need to be issued in both inflation-linked and fixed income formats and be eligible for inclusion in a range of UK Government bond benchmark indices, particularly the FTSE indices.
“The creation of a green gilt will bolster the UK’s credentials as a world leading green investment centre and demonstrate the government’s commitment to achieving the 2050 net zero target,” said Galina Dimitrova, director for investments and capital markets at the Investment Association.
“The green gilt has the potential to provide much-needed investment into sustainable projects and businesses, while providing long-term returns for savers,” she added. “We’re already seeing a strong level of demand from customers for responsible investment products and look forward to working with government and our members to turn the proposed green gilt into a reality.”