UK debt boss pours cold water on “green” government bonds

on Jan 21, 2020
Updated: Jun 1, 2022
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  • UK’s head of Debt Management Office (DMO) has expressed concerns over the issuance of green state bonds.
  • Sir Robert Stheeman poured cold water on the case saying it would be more costly to the public compared to conventional gilts.
  • According to the government official, issuance of green bonds that are meant to impact the environment positively would be a “symbolic” move, but investors must be ready to bear extra costs.

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UK’s head of Debt Management Office (DMO) has expressed concerns over the issuance of green state bonds. Sir Robert Stheeman poured cold water on the case saying it would be more costly to the public compared to conventional gilts.

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Sir Stheeman’s office is mandated with raising billions of pounds each year for the UK government through bond markets. According to the government official, issuance of green bonds that are meant to impact the environment positively would be a “symbolic” move, but investors must be ready to bear extra costs.

Stheeman has been in charge of the DMO for seven years now and is responsible for keeping taxpayers’ expenses low. While he was positive about the impact of green bonds, Stheeman remained sceptical that such forms of debt would make it difficult to maintain a liquid and vast market.

According to him: “One of the natural ways you minimise cost is you try and ensure all your bonds are as liquid as possible. In our case, that usually means building up benchmarks to £20-30bn size. Smaller one-off bonds tend to fragment that process, and the market is not necessarily willing to pay a liquidity premium for those smaller bonds.”

Mr Stheeman’s comments come in the wake of fund managers’ concerns that the UK would be left behind at a time when many countries are issuing green bonds meant to combat global climate challenges.

Several European countries have tested green bonds to set standards for issuing companies.

Investment firm Columbia Threadneedle last year urged Mr Stheeman and ministers to “consider addressing the climate emergency” using green bonds. The firm’s responsible investment director Simon Bond didn’t agree with Stheeman’s assumption that green bond subscribers could end up paying more.

According to Bond, both conventional and green gilts possess identical credit risks, and they would, therefore, trade in the same way.

But Bond cautioned that he would not be willing to pay more if they cost higher: “Our first and foremost concern is we don’t want to sacrifice financial returns. We don’t believe you need to in order to do good for the environment. We think you can have your cake and eat it.”

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