The UK’s £26bn ($32bn) green bond program has been a success for Britain’s finances, but less so for its green credentials. The inaugural 2021 green bond sale attracted the highest number of investors in British debt ever, according to Sir Robert Stheeman, head of Britain’s Debt Management Office.
UK green bonds have sold at a slightly higher price than equivalent non-green bonds, creating a small saving on the UK’s debt interest.
It was all part of the Treasury’s push to make the UK the home of sustainable finance. Unfortunately, green bonds must also have an impact on the real economy, which is where things start to go amiss.
The UK’s first annual green bond update shows that the largest category of investment has been clean transport, which accounts for 47% of green bond cash invested so far. This has mostly been rail, including the renewal of railway tracks, rail electrification, and maintenance of existing rail. This is a crucial first step, as figures from the Department for Business, Energy and Industrial Strategy show that cars, lorries, and vans create 24% of the UK’s national CO₂ emissions, which is even more than its electricity supply.
The primary issue is that British railways are beset by a host of problems. These include the recent strikes but it is other long-running problems like signal failures, as mysterious as they are ubiquitous, that have been getting progressively worse.
Train cancellations have also crept to their highest level in eight years, with the Office of Rail and Road’s (ORR) cancellation score rising to 4.1% for the 12 months to September 2022, the highest level since the ORR began compiling it in 2015. British rail users might question what impact green bond investment is having when services are increasingly cancelled, delayed, and overcrowded. Investors should consider the same.
Lack of green scrutiny
There is as yet no regulation governing the ‘greenness’ of green bonds. The International Capital Market Association, a non-profit, sets principles for issuing green bonds and keeping investors updated on how proceeds are spent, but not the criteria for scrutinising green claims, leaving that to the judgement of investors.
When corporations issue green bonds, they often provide potential investors with presentations showing their sustainability strategy and how the projects financed by green bonds fit in. This helps to show investors that companies are not greenwashing – where green claims are exaggerated for marketing purposes.
The problem with the UK is that it has no such strategy, and the quality of its public transport systems is in decline. Not only is green bond money flowing into a broken rail system, but the lack of a broader policy strategy for public transport, as well as residential buildings, another major source of emissions, implies a lack of a serious strategy to cut emissions.
The UK’s green bonds have ten and 30-year maturities, so perhaps there is time to address this. In the meantime, holders of the bonds who are using them to fulfil green investment mandates are exposing themselves to the second-hand risk of greenwashing; they should start voicing their concerns.