A New Chapter for UK Financial Services, and It’s Green!
Rishi Sunak, Chancellor of the Exchequer, grabbed attention on Monday, November 9th when he took to the floor of parliament to announce the new finance plans for the UK.
He began by crediting the financial services industry, speaking to a new-found appreciation birthed out of the Covid-19 pandemic, ‘Coronavirus has reminded us that financial services are essential services.’
The pandemic was not, however, the only framework that his comments were operating in. Sunak made it clear that Brexit is providing fertile ground for the government to set a new vision for the financial services sector. A vision that is not based on ‘a race to the bottom, but for a financial services industry that is open, is innovative and leads the world in the use of green finance.’
The Brexit thread continued with the Chancellor publishing a set of equivalence decisions for the EU and EEA, later stating ‘we will use equivalence when it is in the best interest for the UK to do so.’
Whilst details of his green finance plans were limited and announcements are set to be made on Monday, a conversation with Bloomberg’s Guy Johnson added more meat to the bones of the idea.
Sunak intends for the first Green Sovereign Gilt to be issued next year. What is more, there is a goal for the UK to be the first major economy to mandate climate disclosures across the economy by 2025.
The driving forces behind the initiative are twofold:
- To bolster the position of the UK as a world-leading finance hub
- Attract capital into funding projects that will help meet ambitions on net-zero
The UK’s green finance plan comes less than 1 month after the European Commission, for the first time expressed it was ‘exploring the possibility’ of issuing green bonds.
When asked about pricing, the Chancellor spoke about the benefits of the sovereign curve and what it might catalyze. It is no secret that green gilts bring in a ‘new class of investor’ and, as he noted: “We are now seeing repeated issuances of sovereign green bonds which trade at tighter spreads to existing gilts; partly driven by different investors coming in – that is something we want to tap into.”
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Narrow spreads are not the only benefit, according to Sunak. The efforts will increase mobilization. The sovereign curve will encourage private companies to ‘piggyback’. Subsequently, helping to establish a green bond market, enabling private participants to issue green bonds too, making sure there is ‘more GBP oriented liquidity in the market’.
Monday’s announcement of Pfizer, the potential Covid-19 vaccine, makes it difficult to discern a pure market reaction to Sunak’s sovereign green gilt. The market, already propped up after the result of the US election, saw a surge after the news of the vaccine.
However, if precedent is anything to go by, one can extrapolate that markets will respond well to the news. Last year’s Emerging Market Green Bonds report by the International Finance Corporation held: “Investor appetite for green bonds continues to grow, and emerging market issuers are likely to benefit from increasing demand.”
When asked how they would ensure that promises made to investors as part of the green gilts would be delivered, Sunak answered non-specifically, making reference to the fact other countries use existing frameworks.
Whilst the Chancellor has said it can be made sure the money goes where it is supposed to, this ‘new type of investor’ he speaks of, may be interested to know the specifics of the UK’s accountability tactics for green gilts and bonds.
These instruments come with particular ethical non-negotiables- this is perhaps why the Seven Pillars Institute’s report coined them, ‘a perfect moral storm.’ Sunak and the government will have to keep this in mind when embarking upon this new endeavor.
In the cover picture: Canary Wharf, London Business District. Photo Credit: Unsplash.
Editor’s Note: The opinions expressed here by Impakter.com contributors are their own, not those of Impakter.com