Boris Johnson faces uphill battle to make UK global green finance hub

Boris Johnson has injected enthusiasm into the UK’s green bond market, but analysts say the country has a challenge ahead to catch up with rivals across the English channel.

Transforming the City of London into the global centre for green finance is a key tenet of the prime minister’s vision for rebuilding the pandemic-stricken economy in a more sustainable way.

His 10-point economic plan unveiled in the Financial Times last month included vows to boost the City’s role in green bonds and carbon trading and to introduce new corporate disclosure requirements.

Analysts said that should help institutions in London increase their focus on sustainable finance, but added that the UK still had a long way to go.

“There’s no doubt about it, continental Europe is far, far ahead of the UK in terms of green bond issuance,” said Trevor Allen, sustainability research analyst at BNP Paribas.

Still, the prime minister’s plans told investors that “this is going to be a growth market”, said Mr Allen. In the context of Brexit, it also signalled to European policymakers that the UK was “an ally in climate change”, he added.

Green bond sales have exploded

The UK is keen to present itself as a green leader ahead of hosting next year’s COP26 climate change summit. But the EU is leading the way in terms of green government bond issuance.

This year, the continent’s benchmark bond issuer, Germany, launched its first green sovereign bonds, following the likes of Poland, France, the Netherlands and Ireland. The UK, meanwhile, announced only in November that it would start its own green gilts programme.

Meanwhile, UK-domiciled companies account for a small slice of green bond indices. French companies make up 24 per cent of an iShares exchange traded fund that tracks the green bonds of top-rated borrowers, with the US and Germany making up about 11 per cent and the UK less than 2 per cent of the debt.

Plans for the UK’s first green sovereign bonds should be a boon to Britain’s market, given the country is a major issuer and its debt is considered to be among the safest in the world, say analysts.

“Issuers will be inclined to align themselves with these developments by transforming their entities into climate-compatible operations, and investors will be encouraged to commit funds to green investment strategies if there is a steady supply of available paper,” said the Climate Bonds Initiative’s latest green bond market report.

Matthew Kuchtyak, an analyst at Moody’s, said Mr Johnson’s 10-point plan made the direction of travel much clearer by outlining priority areas such as renewable energy and zero-emissions vehicles. Before the announcement, there had been some uncertainty about “the level of commitment”, which had held issuers back, he added.

There are also policy hurdles to overcome. Although London is home to an array of bankers and investors dedicated to green finance, it is the EU, from which the UK will be fully cut adrift at the end of this year, that sets the standards for the region.

The UK government has said it plans to implement its own “green taxonomy,” a framework for determining what can be classed as environmentally sustainable finance, which will be based on the scientific metrics in the EU’s version.

More “robust” environmental disclosure standards will also be mandatory from 2025, to enable investors and businesses to better understand and price climate-related risks, the details of which were published last month.

The UK is also set to leave the EU’s system for trading regulatory allowances for carbon emissions in January, and is planning to launch its own system linked to that of the EU — if agreed — or else pursue a carbon tax.

There was already substantial expertise in green finance in the City, and experts would welcome the greater clarity that new sustainable investing frameworks would bring, said Mr Allen.

While London-based investors had tended to look to mainland Europe for green products, “I would not say that green investors [in the UK] are behind” or less sophisticated than their European counterparts, he added.

The euro has to date been the most popular currency for sustainable debt, with 42 per cent of all outstanding green and sustainability bonds globally denominated in the currency, compared with just 2 per cent in sterling, according to the International Capital Market Association.

The dominance of the euro in part reflected its greater popularity among borrowers from a range of countries for all types of debt issuance, but had also been helped by strong policy support for the transition to a greener economy in mainland Europe, said Emre Tiftik, director of sustainability research at the Institute of International Finance.

But the incoming Biden administration in the US could help shift the tide in favour of the UK. The president-elect is set to focus more resources than his predecessor on making the economy more environmentally sustainable. This could boost the green finance sectors on both sides of the Atlantic, said Mr Tiftik, as London grabs a share of that dollar-denominated issuance.

“Once the dollar starts to become much more dominant, which I foresee, London will benefit,” he added, noting the city’s status as “a great financial intermediary”.

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