3 March 2021
Today the Chancellor announced the introduction of Green bonds and gilts and outlined more detail of the remit for the new National Infrastructure Bank.
On green bonds and gilds, Claire Jones, Head of Responsible Investment at LCP, said:
"The government's announcement around green gilts and a green retail savings product is a signal that they are tapping into consumer demand for more sustainable and green saving products and investor interest in funding environmentally friendly projects.
"While this is an important step, the government must make sure this isn't a PR 'greenwashing' exercise for investors and consumers. On the consumer side, savers are savvy and are entitled to clear and robust commitments on how their money will be used. They will want to know that their money is going into new green projects, not just rebadging projects that were already planned. It will be interesting to see how the interest rate and terms that are offered impact take up and how attractive they are compared to other savings products. While some retail customers will want to invest regardless, the question remains around whether other investors will be willing to accept a trade-off between green credentials and financial returns.”
On the details of the National Infrastructure Bank, Dan Mikulskis, Investment Partner at LCP, commented:
"Reaching Net Zero is going to involve an eye-watering expansion of new infrastructure and technology. The National Infrastructure Bank could be good news, acting as a cornerstone investor on key projects and helping to provide financing for newer technologies that at the moment are un-investible to institutional asset owners because of their risk and unproven nature. With the bank being a backer of bonds issued to finance projects it makes some of these projects eligible for the large-liability investing programs pursued by many DB pension schemes and which amounts to over £700bn in assets. The model is already there in the Network Rail bond issue, which is popular with many schemes.
"As ever the devil is in the detail and there could be some unintended consequences and missed opportunities if the bank isn't used in the right way. First, there is a risk that the cheap public-sector financing could crowd out the private sector, particularly if the speed of decision making was misunderstood as a lack of demand. Second, low cost debt financing could result in projects borrowing excessively which makes the equity investment more risky than it needs to be. The government could also use this Bank to invest in new technologies that are deemed too risky by the rest of the investment community – with consumers picking up the bill if these projects fail.
"Finally, if this is to be successful it can't follow the fate that befell the Green Investment Bank, which was sold off in 2017 and now bids against UK investors To make sure it facilitates the transition to Net-zero and unlocks investment rather than becoming competition for investors, the government needs to take steps to ensure that the National Infrastructure bank can't be sold off."