Answer ... In June 2021, the UK Debt Management Office and Her Majesty’s Treasury published the UK government’s Green Financing Framework. This framework describes how the UK government plans to finance expenditures through the issuance of green gilts and the retail Green Savings Bonds that will be critical in tackling climate change and other environmental challenges, funding much-needed infrastructure investment and creating green jobs across the United Kingdom. It sets out the basis for the identification, selection, verification and reporting of the green projects that are eligible for financing from the proceeds of the UK government’s green gilt programme and the retail Green Savings Bonds. The framework aligns with the Green Bond Principles as published by the International Capital Market Association (ICMA).
The ‘green finance’ arrangements in the United Kingdom are discussed below.
Green loans: This is used as a generic term for any type of loan instrument whose proceeds are used to finance or refinance environmentally sustainable activity. In March 2018, the Loan Markets Association and the Asia Pacific Loan Market Association launched the Green Loan Principles with the support of the ICMA. The Green Loan Principles act as a framework of market standards and guidelines, with the aim of ensuring consistency in the methodology used across the green loan market. They are based on ICMA’s Green Bond Principles, with the aim of producing uniformity across the financial markets.
Demand for green loans has increased exponentially over the past few years as companies seek to enhance their perceived green credentials and also in light of the anticipation of increased reporting and regulatory oversight in this area.
Sustainability-linked loans (SLLs): These loans present an alternative format of green or sustainable loan whereby the interest rate of the loan can be stepped up or down according to the borrower’s change in sustainability rating over the time period of the loan. While SLLs have been used for some years, publication of the Sustainability-Linked Loan Principles marks the first time that a set of sustainable finance principles from an industry body has deviated from the ‘use of proceeds’ model.
Green bonds: Green bonds are a natural source of financing for issuers that have a financing or refinancing requirement for a green project. There does not currently appear to be a premium for green bonds compared to non-green bonds of the same issuer. An issuer that will use the proceeds to finance projects towards its environmentally friendly programmes (eg, to reduce its carbon footprint or waste from its ordinary business activities) can also tap the market and further signal its commitment to its cause. Green bonds can be attractive to investors with the right balance of the green and commercial aspects.
Sustainability-linked bonds (SLBs): These are bonds whereby the proceeds from the issuance are not ring-fenced for green or sustainable purposes (unlike ‘use of proceeds’ green bonds or sustainable bonds), and may be used for general corporate purposes or other purposes. Instead, the SLBs are linked to the performance of certain key performance indicators in achieving pre-defined sustainability performance targets; depending on whether this is achieved, certain characteristics of the SLBs may vary (eg, coupon ratchet). Therefore, issuers are committing explicitly to future improvements in sustainability outcomes with a pre-defined timeline. SLBs are a forward-looking performance-based instrument.
Sustainable securitisations: Certain characteristics differentiate sustainable securitisations from conventional securitisations, as follows:
- the sustainability of the assets backing the securities;
- the potential to amalgamate sustainable assets into pools to fund sustainable structures;
- the sustainable use of proceeds of the securities (under the ICMA’s Green Bond Principles); and
- the constituents of the investor base.
Although the sustainable securitisation market has expanded over the past few years, much of its potential remains latent. This is due to a perceived lack of readily available sustainable assets to collateralise. However, there is now a critical mass of eligible assets – such as sustainable corporate loans, sustainable mortgages and loans for hybrid and electric vehicles – to make sustainable securitisations viable and profitable. It is now just a question of market education and re-examination of potentially eligible assets for sustainability.
On 12 October 2021, the Geneva Association and the Organisation for Economic Co-operation and Development held a high-level meeting entitled “Future Proofing Technological Innovations for a Resilient Net-Zero Economy”. The main purpose of the meeting was to sketch out some of the discussions that will take place at COP26 in Glasgow in November 2021.
The key messages from the meeting were as follows:
- Insurers will play a vital role in assessing, pricing and managing risks relating to untested technologies for sectors to transition to net-zero emissions. Innovations in insurance products and services are needed to support adoption and large-scale deployment, where market conditions allow.
- Deeper cross-sectoral partnerships can fast track the de-risking and adoption of new technologies – particularly between insurers, carbon-intensive industries, technology and engineering companies, the financial sector and governments.
- Enhanced coordination of public and private investments, alignment of investors’ risk/return profiles and de-risking could enable more sustained financing for the commercialisation of climate technologies.
- Governments can create an enabling environment to incentivise market development and boost demand for technological innovations in energy, transportation, food and water systems and other carbon-intensive sectors – as well as the greening of the public infrastructure.