With the UK Government, COP26 hosts, looking at net carbon targets, renewables sustainability and infrastructure projects and ways to fund this without necessarily increasing direct or indirect taxation, much has been made of the issuance of Green Gilts to institutional buyers and a National Savings Green Bond available to the person in the street. Alongside the explosion of Environmental and Social Governance investments available, and encouragement for companies to improve their social governance and sustainability credentials with initiatives such as B Corp status moving mainstream, the options for people who are interested in what their money does, as how much it grows by, are increasing significantly.

Interestingly, in all the press around the Government’s move into the “Green Bond” field what was easily missed was that really they were rather behind the curve on this one. Between 2012 and 2020 global issuance of Green or Sustainable badged Bonds and loans increased from c$32bn to c$750bn (source Bloomberg). Yet despite this level of issuance, the first Gilt issue was 10x oversubscribed and the second 16x oversubscribed, showing that supply is yet to get anywhere close to demand. So there is a genuine interest in using investments in ways that should help address the impacts of climate change, increase sustainability and renewability and improve the way in which the corporate world interacts with society.

For most people there still needs to be a balance between returns and ethics, given that as much as one may be concerned generally about the world there is the more immediate concern that one will be able to support oneself throughout life. It used to be commonly felt that if you invest in something which is “ethical” or “green” this meant accepting lower returns and we still occasionally get this question from clients. Although applying particular filters to possible investments in any market will obviously reduce the ability to diversify and to access all aspects of that market, that doesn’t necessarily mean that you have to accept lower returns. Indeed there is an increasing body of evidence which suggests that companies that embrace environmental and social governance reap benefits in improved returns from staff and customer engagement for example.

In the fixed interest space this potential benefit doesn’t hold true in the same way however. The Green Gilts issued were issued at slightly below the yield of an equivalent conventional issue, which for most would seem reasonable. In the retail sphere however the 3 Year NSandI Green Bond offers 0.65% per annum taxable, tied in fully for the three year period. Top rates for 3 Year Bonds are c1.8% however, and even if you wish to stick to more of a “household name” you can get between 1% and 1.4%pa by comparison. So the cost of Green for the person in the street is not to be underestimated.

The other area to be wary of is whether it does what it says on the tin. In the investment sector there has been a huge amount of discussion over “greenwashing”; the process of badging a fund as “green” in order to capture the demand for these types of investment without really applying environmental principles to the underlying investments. It isn’t always easy to see exactly what is happening under the bonnet of an investment fund and there appear to be investment companies out there that seem to have a passing acquaintance with the principles of renewability and sustainability.

Whilst this will hopefully not be an issue with Green Gilts, the fact that the Indonesian government issued a “Green Bond” in 2018 which included elements of deforestation is a salutary reminder that it’s what it does not what it’s called that is important.