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Green bonds - the future for investment

The signature of the Paris Agreement, and the adoption of the Sustainable Development Goals outlined by the UN, have been a real catalyst for national authorities and sovereign states to re-evaluate their renewable energy strategies and increase support for innovative funding structures and green infrastructure investment.

In order to meet current UK targets to reduce greenhouse gas emissions, improve air quality and increase use of and reliance on sustainable energy sources, increased investment in green infrastructure will be needed in order to avoid continued dependence on high-carbon fuels and minimise the anticipated impact of climate change events.

The Aldersgate Report, issued earlier this month, set out a number of key proposals, for government as well as businesses and investors, in support of a call for strategic government intervention so as to maximise the opportunities for green infrastructure investment.

The recommendations were centred around five key areas: policy stability and market signals; regulatory barriers and drivers; smarter public spending; awareness raising and education; and innovation support. In addition the report also addressed businesses and investors with comments highlighting the need to address market short termism and do more to publicise positive returns from green energy investments.

In particular one area of focus for the Report was how government can encourage private investment in specified infrastructure projects, alongside public investment, in order both to lower the risk profile of significant investments for all involved and ensure that value for money is delivered for the public purse. 

The writers suggest that this should be tempered, however, by analysis of the highest  priority strategic targets for such investment so as to ensure that public funds are principally utilised where required to stimulate private investment and not to an extent that adversely affects appetite in the existing green investment market.

A key suggestion is that, in order to reduce the risk that a funding gap develops following on from the privatisation of the Green Investment Group, as well as to mitigate the effect of Brexit on funding relationships formerly supported via the European Investment Bank, government could take active steps to revitalise the green investment market and send a strong public signal in support of green investment strategy by creating a sovereign green bond.

Since December 2016 four sovereign states have issued green bonds – Poland, France, Fiji, and Nigeria – in aggregate raising the equivalent of just over €7.8 billion – sending a strong signal to investors that investment in green projects is here to stay and to the renewables sector that governments are supportive of the industry.

The UK government could similarly take advantage of its ability to set policy and persuade investors including pension funds, asset managers and insurance companies as well as retail investors to invest in green bonds – for example by means of providing subsidies or tax incentives to investors who elect to subscribe for sovereign or municipal green bonds. 

Awareness of the need for clean energy has never been higher and there is already a move towards local communities taking charge of their energy use which is likely to lead to the creation of local energy networks and decentralisation from the grid. In addition, with both companies and individuals looking to make more ‘ethical’ investments, this could be an ideal time for the UK to follow the US and Scandinavia where municipal green bonds have been used with great success to fund green infrastructure projects. 

Schemes which are funded through the use of municipal green bonds are not only going to have much higher community engagement (because those investing will feel like they are investing in their futures), but may also allow for schemes which would not otherwise get built out to proceed: and if you add in the local community as direct off takers then you suddenly have a very accessible vehicle which allows local communities to fund, build and benefit from clean energy schemes.   

The issue of green bonds, it is hoped, will facilitate co-investment by the public and private sector into a range of green energy projects and meet the costs of developing the required infrastructure for these projects, each of which are necessary if sovereign states like the UK are to meet commitments made in line with international strategy to address climate change. 

The challenge will be to show that these investments can deliver financial upside to investors as well as delivering wider environmental benefits and accelerating the pathway to satisfaction of national targets around green energy.

This article first appeared in Renewables Investor. 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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