Gilts go green

On 9 November 2020 in parliament, the Chancellor of the Exchequer announced: “To meet growing investor demand, the UK will, subject to market conditions, issue our first ever Sovereign Green Bond next year. This will be the first in a series of new issuances, as we look to build out a ‘green curve’ over the coming years, to help fund projects to tackle climate change, finance much-needed infrastructure investment, and create green jobs across the country.”

You may have read our previous blog flagging some of the considerations of green gilts for defined-benefit pension schemes implementing liability-driven investing (LDI).

We have been engaging with a number of stakeholders in this area and are excited to hear the latest update from the Chancellor. While we don't yet know some details (for example, the use of proceeds, such as ring-fencing), we are particularly pleased to note that the UK government is looking to build out a full ‘green curve’ over time, which means that the yield give-up or pick-up (compared with neighbouring ‘non-green’ gilts) should be much more transparent.

At LGIM, we aim to harness the power of responsible investing to effect positive change, and our holistic approach to the integration of environmental, social, and governance (ESG) considerations will naturally incorporate the evaluation of green gilts in our mandates. In particular for LDI, where gilts are a primary instrument, if the gilt launched has unique characteristics beyond its green nature (such as a longer duration or higher convexity than neighbouring gilts) then it may be the most efficient instrument for some mandates. Hence, it could be right for us to invest in the bond without any action needed by clients.

However, we are seeing a significant shift among our clients, with many increasingly keen to express sustainable investing and ESG views in their portfolios.

Once the government shares more details, we will consider further and engage with clients on how these bonds can form part of LDI hedging and other mandates.