Green gilts: Is a British sustainability-linked bond still a long way off?

CORRECTION: An earlier version of this piece referred to the 'twinning' bond approach as deriving from France when it is from Germany, and used 'sustainable bond' when intending to describe 'sustainability-linked'

Fixed income issuers not meeting sustainability targets can go to show the ambition of the bond rather than the failure of the concept or greenwashing, green finance movers and shakers discussed in London.

During a panel discussion in London, Ignacio de Calonje, chief investment officer for energy and sustainable finance at the International Finance Corporation, told delegates: “The fact that a [sustainability linked bond] issuer doesn’t achieve a target for me is not in itself a problem." 

Adding: "If everybody achieves the target, that will be an issue. My rule of thumb is there has to be a 50/50 chance whether an issuer will succeed, so as to be ambitious enough that there's a reasonable chance they won't hit the target.”

He was responding to a question on reputational risk facing Greece’s Public Power Corporation, after it failed to meet a 40% reduction in the firm's Scope 1 carbon emissions by December 2022 versus the 2019 level. A coupon step-up of 50 basis points in its sustainability linked bond is set to apply due to this.

De Calonje’s comments were made during a panel discussion at the Official Monetary and Financial Institutions Forum’s (OMFIF) Sustainable Policy Institute event, hosted in London.

Also on the panel speaking on innovation, frameworks and capital market growth in the GSS sector was Marcus Pratsch, head of sustainable bonds & finance at DZ Bank, and Jessica Pulay, co-head of policy and markets at the UK Debt Management Office.

Last month a provisional agreement was reached on a European green bond standard, a key tenet of which was issuers needing to demonstrate that they are funding legitimate green projects aligned with the EU taxonomy on sustainable activities.

Pratsch said: “The European green bond standard is, from my point of view, a very ambitious thing. With back testing, only a few current bonds would now be fully EU taxonomy compliant. The European Green Bond Standard can only work if it's really accepted, and at the moment, I'm still a little bit cautious.”

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Sovereign green gilts

On the topic of sustainability linked bonds, Pulay was insistent that the UK government had “no immediate plans” to launch such a bond. 

The UK launched its first green gilt in September 2021, raising £10bn for green projects.

Pulay also spoke highly of the sovereign French approach, as well as the German “twinning” approach to green bonds, issuing a green bond and equivalent standard bond simultaneously.

“With this strategy, you can trade off one against the other”, she said.

Also at the last day of the OMFIF conference was a panel discussion on ESG data and the green transition.

On the critical need for high quality ESG data in the sustainable finance space, Antonios Panagiotopoulos, executive director within MSCI’s ESG & climate research department, said: “I need to be able to give my clients an idea of what the exposure is in a portfolio from a specific company. If I am to engage this company, look to transform this company as opposed to divest from it, I need some data from them. It cannot be faith based Investing.”

Last month, research conducted by a team in Germany found that carbon-emission measures suffer from data inconsistency. The researchers argue that investors who analyse financial risks from climate change depend entirely on firm-level emissions data.