05 May Think tank suggest UK introduce sustainability bonds to support net-zero targets
The New Social Market Foundation report urges the UK Government to introduce “sustainability-focused” bonds, which would pay more to investors if the UK Government doesn’t achieve its decarbonisation targets.
Chile recently became the first nation to launch such a bond, and the report believes the UK should follow a similar path and aim to be a global leader in sustainability-focused finance.
Green finance represents a considerable economic opportunity for the UK. The Social Market Foundation estimates that 200,000 finance and insurance industry jobs are ‘green-related jobs’. Low carbon finance is likely to grow significantly more than any green sector. The new report calls for the Government to do more to secure UK’s place as the global centre of green finance.
The think tank explains that financial services will be critical in decarbonising the British economy, providing the necessary capital to invest in green technologies and new business models. The SMF predicts that 200,000 jobs in finance and insurance are green jobs, with employees committing at least 20% of their time to sustainability-focused activities.
The report believes that the UK Government should do more to ensure it can develop into a global sustainability finance hub. The findings suggest the introduction of a new Sustainable Development Goal-based bond, which would pay more to investors if the UK Government fails to reach its decarbonisation targets.
The first SDG-focused bond was launched by Italian power company Enel in 2019. It included a 55% share of renewables in power generation capacity by the end of 2021, with a series of measures in case of failure, indicating higher borrowing costs or a financial penalty for failing to reach the sustainability targets. Earlier this year, Chile introduced the first sovereign sustainability-linked bond. The bond meets the Paris Accord on climate change, including that emissions do not exceed 95 metric tons of Co2 and equivalent by 2030 and that at least 60% of electricity production derive from renewable energy by 2032.
SMF believe that the UK should follow a similar path to Chile by implementing a new government bond linked to net-zero targets. The briefing also calls for the UK Government to provide more focus on supporting pension funds that invest in green infrastructure. While approximately £800 billion worth of UK pension schemes aligns with net-zero, around 70% of these plans with a value of £2 trillion are yet to make any net-zero commitments or have deployed capital in net-zero focused projects.
Scott Corfe, the research director of SMF, explains that financial services will be critical to achieving net-zero and green finance could be a potential economic success for Britain. Corfe highlights that 200,000 financial services workers are in green-focused roles and will inevitably increase over the next few years. The UK Government must collaborate with the financial services industry to make Britain a global leader in sustainability-focused finance. Introducing new sustainability government bonds associated with net-zero targets would support green financial services, but the concept of financial penalties for missing targets would improve the commitment to decarbonisation.
Raul Rosales, the report co-author, explains the need for a carbon tax policy and transition framework to incentivise net-zero funds and other incentives to invest in infrastructure funds and take a leading role in sustainability-focused bonds. Partnerships between financial services, the UK Government, and other organisations will be critical for reaching net zero.
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