By David Milliken and Yoruk Bahceli
LONDON -Britain sold 10 billion pounds of its first ‘green’ government bond on Tuesday after attracting over 100 billion pounds ($137 billion) of demand from investors, a record high that shows the clamour for assets that can be marketed as good for the planet.
Proceeds from the sale will be ring-fenced for projects such as offshore wind farms and zero-emission buses, and also help Britain’s government polish its green credentials before hosting the United Nations COP26 climate conference in Glasgow in November.
Britain has lagged behind other European countries such as Germany, Italy and Spain in issuing this type of debt, partly because of concern that investors would want higher interest rates to compensate for a relative lack of liquidity.
However, investors’ appetite for green debt has surged over the past year and a half – partly because of its appeal to funds dedicated to buying green assets, but also due to concern that regulators and other stakeholders will in the future look more closely at the overall environmental impact of portfolios.
Tuesday’s launch of the new gilt maturing in July 2033 represents the largest single sale by a sovereign issuer, topping the previous 8.5 billion euro record set by Italy in March.
“It’s confirmation that the demand is there even in sterling, not just in euros,” said Antoine Bouvet, senior rates strategist at ING.
Britain aims to raise around 15 billion pounds in total this year from Tuesday’s sale and a new 20- to 30-year maturity green gilt next month, a relatively small fraction of the 253 billion pounds in total gilt issuance that is planned.
Foreign investors made up 17% of the demand, above the 10% that is more typical at a gilt syndication. Part of the increased foreign demand reflected the shorter maturity of the gilt than is usual at British syndications, but the novelty of the green gilt was also a draw.
The more than 100 billion pounds in orders for the gilt were the highest ever for a British bond syndication, topping a previous record of 82.6 billion pounds in May 2020. Investors typically do not expect orders to be filled in full.
The new 2033 gilt will pay a coupon of 0.875% and has been priced to give a yield of 0.8721%, 7.5 basis points more than the conventional June 2032 gilt, at the tight end of initial guidance.
Asif Sherani, HSBC‘s head of EMEA debt capital markets syndicate, said this reflected a 2.5 basis point ‘greenium’ – the slightly lower yield green bonds offer versus conventional debt, generally due to a dedicated investor base chasing a limited supply of these assets.
Matthew Amis, an investment director at Aberdeen Standard Investments, said the gilt was less pricy than some other green debt – which is often expensive in the secondary market – and offered fair value versus conventional gilts.
“We expect this gilt to perform well in the coming days and months,” he said.
The Bank of England has said it will buy green bonds as part of its asset purchase programme.
Barclays, BNP Paribas, Citi, Deutsche Bank, HSBC and J.P. Morgan acted as joint leads on the syndication.
($1 = 0.7305 pounds)