• The government has sold £10 billion of its first green gilt this afternoon, but reports suggest over £100 billion of bids were received
• This shows huge institutional demand for green government bonds
• Just £5 billion more of UK green gilt issuance is planned this year
• NS&I will also be issuing a £15 billion green savings bond later this year
• Issuing the NS&I bond at a market leading rate would cost the taxpayer £210 billion a year
Laith Khalaf, head of investment analysis at AJ Bell comments:
“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.
“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 3 year cash rates currently stand around 1.8%, yet the government can borrow money on the conventional gilt market at under 0.4% 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%, 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 3 year bond at the gilt yield of 0.4% 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.
“There will be questions of course about whether these green financing initiatives are entirely necessary, seeing as the government could simply raise money through conventional gilts and NS&I accounts to fund their green spending priorities. That may well be the case, but these green products do at least provide an environmentally friendly option to savers and investors who want to do their bit, and would to like see their money put to good use.”