Sustainability-linked bonds would show UK government is committed to net zero

Investors would be paid out more if Westminster fails on climate targets with ‘Chile-style’ sustainability bonds. 

A new report by Social Market Foundation (SMF) calls on the UK government and Chancellor Rishi Sunak to take bolder steps to support the country’s rapidly growing ‘green sector’ and meet net zero and other climate commitments. 

Specifically, the study recommends issuing bonds linked directly to sustainability, which would pay out more money to investors if Westminster fails on its own environmental targets. Chile recently became the first country in the world to issue a sovereign sustainability-linked bond, with other governments now considering following suit. Experts say that if the UK is to be considered a true world leader on sustainability-tied finance, taking this step is essential.

In 2019, Italian power utility company Enel became the first ever issuer of a Sustainable Development Goal (SDG) bond, targeting a 55% share of renewables in its power generation capacity by the end of 2021, and outlining a 25-basis points step-up in case of failure, implying a financial penalty for not meeting targets. According to SMF estimates, the UK is already home to 200,000 ‘green jobs’ within the finance and insurance sectors, accounting for 19% of all positions in those industries. Already, £800bn worth of UK pension schemes are aligned with net zero, but more 70% – valued at £2tn – are yet to commit in this way. 

‘Green finance could be one of Britain’s great economic success stories in the 2020s,’ said Scott Corfe, SMF Research Director and one of the report’s authors. ‘Government needs to work in partnership with the financial services industry to make Britain the leading hub of sustainability-linked finance. Leading by example, the Chancellor should issue a new generation of sustainability-linked government bonds which would tie interest payments to the country’s net zero targets. Not only would this support green financial services, but the prospect of financial penalties for missing net zero targets would strengthen the Government’s commitment to decarbonisation.’

‘The financial services sector will play a key role in reaching net zero targets and helping industries to decarbonise and finance new energy technologies,’ added Raúl Rosales, co-author of the report and Senior Executive Fellow at Imperial College Business School’s Centre for Climate Finance and Investment. ‘We need a carbon tax policy and transition framework to incentivise net zero funds, financial and tax incentives for pension schemes to invest in infrastructure funds and to take the global lead in the space of sustainability linked bonds, all while not compromising the balance sheet of banks. Partnerships between government, financial services, industry and leading universities, fostering centres of excellence, will be essential for reaching net zero.’

Photo credit: Markus Spiske