Over the next two months, the UK government plans to issue two green gilts which will total a minimum of £15bn for the 2021-22 financial year. But how much will this really influence government spending plans?

This highly anticipated new type of gilts is to be used on expenditures that meet the environmental eligibility criteria set in the HM Treasury’s expenditure categories framework. It includes clean transportation, renewable energy, energy efficiency, live and natural resources, climate change adaption, and pollution prevention and control.

Money that is raised through a green gilt can only be used for certain ‘green’ purposes. But, some have pointed out, a normal gilt could be used for those purposes too. 

The Treasury will publish an impact report on the environmental impacts and social co-benefits of the eligible expenditures, with the first report to be published no later than two years following the inaugural issue and then at least biennially thereafter. 

The green gilts come with additional disclosures and various mechanisms, aiming to give investors confidence about where the money will be spent. But, some believe this isn’t enough.

“There is still nothing to indicate that the future ‘green’ spending would not have been made regardless,” says Natalie Winterfrost, trustee director at LawDeb Pension Trustees. “So there is a lack of clear evidence that buying a green gilt, rather than a conventional one, will actually influence government spending plans in any way.”

Winterfrost points to the high demand for green investments, meaning they tend to come at a premium for investors. She says: “It doesn’t seem unreasonable to presume that expectations of a ‘greenium’ is part of the attraction to the government.”

She argues that from the perspective of a pension trustee, whose overriding fiduciary obligation is to consider financial matters, “the underlying credit exposure to the UK government is the same, but the liquidity may be impaired – at least initially – due to the relatively small issuance size".

The green gilts issuance “doesn’t fundamentally change what the UK government are doing in terms of funding action on climate change and other environmental concerns,” says head of responsible investments at consultancy LCP, Claire Jones. 

As COP26 is fast approaching this November, the UK has the opportunity to show leadership on climate change policies. In April this year, the government announced its new target to slash emissions by 78% by 2035, more than three-quarters of the way to net zero by 2050. The green gilts aim to help establish the green finance market in the UK ahead of these targets. 

Jones says having expertise in this area can “help to catalyse the market for green bonds more generally where there may well be issuers who are using it to finance additional spending”, but admits that this is not where most people are focusing their attention. 

Some have called for investors to use their influence to encourage a higher proportion of UK government spending to be directed towards environmental objectives, rather than reallocating existing spending. 

“For investors who are concerned about climate change and the other environmental objectives, I think they will be better off focusing on what the UK government is actually doing in this area,” says Jones. 

“At the moment we’ve got a lot of high-level aspirations and a lack of actions to actually meet those aspirations,” she adds.

Jones says the gilts have seen “cautious responses from investment managers so far”. It is expected that those investing will be investors with particular sustainability objectives that can be prioritised over financial consideration. 

“It’s possible that pension schemes will be investing in green gilts, but my expectation is that they won’t in the short term,” says Jones. 

With no additional benefits of investing in these gilts over ordinary ones, it is doubtful how many pension schemes will invest. “I'm expecting that the green gilt issuance will be over-subscribed, which will essentially mean that investors are paying a premium to get the green label. For a pension scheme that's got to act in the best financial interest of its members it's hard to justify why it would do that,” says Jones.