A government bond is where your government borrows money from investors such as private investors, banking institutions, pensions and investment companies. The government then issues a bond (in the UK they are known as Gilts) where it agrees to pay a fixed or inflation linked interest rate (coupon) each year (usually every 6 months) and then at the maturity date, you receive your final coupon and the original capital face value back.
Green Bonds/Green Gilts work on exactly the same principal but the government invests in environmentally beneficial and socially responsible infrastructure projects.
In the UK, as part of the Paris Agreement on climate control, the UK government committed to being carbon neutral by 2050 (it is now looking to reduce this target). In addition, on 9th November 2020, Chancellor Rishi Sunak announced at the Green Horizons Summit that the UK would issue Green Bonds for the first time in 2021. This follows many EU countries that have already done so including Germany and indeed Poland, who were the first in Europe to do so some 5 years ago.
Many UK fund managers are backing this launch although we have to say it may be difficult to set an interest rate return as ESG (Environmentally friendly, Socially responsible and Governance) funds are difficult to audit to ensure their ‘green’ credentials as well as difficult to value returns as they may take many years to deliver any benefit to the planet.
Tax Efficiency: Gilts are usually capital gains tax free for individuals but income tax is due on the interest/coupon received. We see Green Bonds/Green Gilts working in a similar way.
Watch this space for more on Sovereign Green Bonds, more to follow when we know more.