UK green bonds proposal targets pension funds

Government commission sees major role for institutional investors in climate change financing

Green bonds targeted at institutional investors are a key part of new proposals to fund climate change projects in the UK.

The idea comes in plans to form a Green Investment Bank released by a government commission today. The bonds would be similar to existing green bonds issued by the World Bank and the European Investment Bank.

The Green Investment Bank Commission, headed by former Merrill Lynch Europe head Bob Wigley, envisages UK pension funds and insurance companies potentially allocating up to 5% of their total bond investment to the new bonds.
The Commission estimates that £550bn of investment could be required for the UK to meet its climate change and renewable energy targets by 2020.
It says it’s “critical” to access the vast pools of capital of institutional investors – but recognises this will only happen if institutions can earn adequate risk adjusted returns and if appropriate market structures are in place.
“The market will need to be deep enough and long-dated enough to provide the necessary liquidity,” the Commission says in its 50-page report Unlocking investment to deliver Britain’s low carbon future’s%20low%20carbon%20future%20-%20green%20investment%20bank%20commission%20report%20-%20final%20-%20june%202010.pdf. “Pension funds and insurance companies willrequire a good reason to shift from gilts, private equity, venture capital or real estate.” The idea comes as traditional pension funds are reducing their equity allocation in favour of debt, the report notes.
“We believe that a properly structured green bond would be one way of accessing institutional resources,” the report states, while recognising that pension trustees approach new investment areas cautiously. “Work needs to start immediately if the capital is to be available in the timeframe required.”
The bonds could be used in two ways. Firstly as a means of financing the Green Investment Bank and secondly as a way to lower the cost of debt for projects where the GIB or the government provides risk mitigation for the project debt.
The commission says the “plethora” of government bodies in the climate change area and the mixed history of public-private finance initiatives have made projects “too complex” for insurance and pension fund investment. Funds need greater certainty about the legislation governing projects’ returns and more transparency on the funding process and parties involved before they will invest.
Another proposal is for green ISAs (Individual Savings Accounts), which the Commission says would be an “important and visible” way for retail investors to make a contribution to green funding.