Recommendation 8

HM Government Acknowledged

The Government has always remained open to the introduction of new debt financing instruments, including green bonds. However, before doing so the Government would need to be satisfied that any new instrument would meet value-for-money criteria for the taxpayer, enjoy strong and sustained demand in the long term, and be consistent with debt management and wider fiscal objectives. After carefully monitoring how the sovereign green bond market has developed over recent years and conducting a detailed assessment against these criteria, the Treasury and UK Debt Management Office (DMO) believe that now is the right time to issue this type of instrument. At Budget the Chancellor announced the UK’s commitment to issue at least £15bn of green gilts in FY 2021/22, as the UK looks to build out a green yield curve, and to report on the social co-benefits of green spend. While the UK is by no means the first sovereign to enter this market, this announcement demonstrates the UK’s ambition to be a large, innovative issuer in this space. In addition, on 30 June, the UK Government Green Financing Framework–under which the UK will issue green gilts and National Savings & Investments’ (NS&I) Green Savings Bonds–was published. This ambitious document details how proceeds raised from these products will be used for financing green expenditures which will help tackle climate change and other environmental challenges while creating green jobs across the UK. It lays out the six categories of green expenditures to be financed: Clean Transportation, Energy Efficiency, Renewable Energy, Pollution Prevention & Control, Living & Natural Resources and Climate Change Adaptation. In its Framework, the UK is going further than other sovereigns in many areas: i) we are the first to issue a bespoke green retail product tied to a sovereign green bond framework; ii) we are the first major sovereign to commit to reporting on the important social co- benefits of green expenditures financed by the green gilts and retail product, such as job creation and access to affordable infrastructure; and iii) we are setting an ambitious 50% minimum threshold on the proportion of proceeds that will be allocated towards financing current and forward-looking green expenditure, as well as limiting the financing of past expenditures to one year prior to issuance. This is as forward-looking as any major sovereign issuer to date (the Netherlands and France have adopted the same approach). While the pricing of a green gilt is untested until a transaction takes place, the Treasury and the DMO are confident that the inaugural green gilt will price competitively relative to the conventional gilt curve. This is based on market feedback about demand for the green gilt and the recent experience of comparable sovereign issuers, and assumes current market conditions. The Treasury and the DMO will continue to assess the value-for- money case for green gilts, including assessing the latest market and demand conditions when considering issuance. The Government’s debt management objective remains to minimise, over the long term, the costs of meeting the Government’s financing needs, taking into account risk.