91.During our inquiry we heard about the range of green financial products like green bonds, ISAs or mortgages that could potentially make more capital available for clean energy or environmental projects. The Government’s Clean Growth Strategy promises to develop green mortgage products and work with the British Standards Institution to develop green and sustainable finance standards.
92.In the Clean Growth Strategy, the Government pledged to ‘work with mortgage lenders to develop green mortgage products that take account of the lower lending risk and enhanced repayment associated with energy efficient properties.’ The Green Finance Taskforce also recommended that Government ‘provide short-term incentives to pump prime the green consumer loans and green mortgages markets’.
93.The Grantham Institute questioned the assumptions underpinning the Government’s pledge. It argues that the claim that energy-efficient households have lower mortgage default risk needs better empirical corroboration. It says robust empirical analysis on the relationship between energy efficiency and mortgage default is limited, with one US study from 2014 often cited.
94.The Grantham Institute pointed out that there are several concerns with drawing conclusions from this study that would be applicable to the UK. Its primary concern is whether or not the study presents a sufficiently convincing case for causality–is higher energy efficiency indeed the cause of better repayment behaviour? It cites evidence that energy efficiency measures tend to be adopted by those with higher incomes as well as those with greater concern for the environment. Sini Matikainen explained the Grantham Institute’s concerns:
…the way the Clean Growth Strategy specifically focused on green mortgages and the lower interest rate, the lower mortgage default rate associated with it, especially siloed away from other energy efficiency considerations, is somewhat concerning. It would be better to think that lower interest rates might be part of an overall push towards energy efficiency but in some instances it might not be sufficient. The rental market is an interesting point. There is a large buy-to-let market in the UK, so the person who is paying the mortgage is not the one paying the energy bills. In that sense it might not have a lower credit default rate. The evidence for that is based on one study from the US, which is insufficient.
95.We asked Barclays about this when it gave evidence because of the work it had done in packaging up and refinancing mortgages in energy efficient homes as a green bond. The Chair of Barclays Green Banking Council, Rhian-Mari Thomas, said that the bank’s own analysis had also shown a correlation between loan-performance and a home’s energy efficiency rating. She said Barclays would need to do more analysis and look more closely at the causality and the precise reasons. However, she added that:
A green mortgage in itself is unlikely to be the panacea. It needs to be part of a broader group of products, for example green consumer loans, to support energy efficiency retrofits, such that people can apply for a green mortgage almost as an aspiration.
96.Any policy to promote green mortgages must be based on robust evidence from multiple sources. Government policy should not be made on the basis of one US study. To avoid repeating the policy failures of the Green Deal, it is also important to be realistic about the impact and potential take up of green mortgages. It may well be that improvements in the energy efficiency of the UK’s housing stock can be more efficiently achieved with other measures—such as building regulations like the Zero Carbon Homes policy scrapped in 2015, or the Mayor of London’s boiler scrappage scheme.
97.During 2017 there were 27 green bonds listed in London, raising $10.9 billion compared to 14 green bonds in 2016 that raised $5.65 billion. In November alone there were seven green bonds listed in London by Australian, Danish, Finnish, Indian, Japanese and UK institutions. We heard that bonds can provide the long-term, stable investment returns which institutional investors need. Since the Paris Agreement, there has been rapid growth in the number of bonds labelled as ‘green’ listed on the London Stock Exchange. In 2017, there was a 92 per cent growth in green bonds listed on the London Stock Exchange and a 78 per cent increase in money raised.
98.Despite London’s success in attracting the listing of green bonds, the UK is lagging well behind other leading economies when it comes to the domestic issuance of green bonds. There has been only $3.9 billion of issuance in the UK compared with $24.9 billion from Germany and $41 billion issued in France. The Climate Bonds Initiative has provided the graph below, ranking countries according to their cumulative issuance of green bonds. The UK does not make the top ten.
99.In November 2017, Barclays became the first UK bank to issue a green bond, raising €500 million on the London Stock Exchange. Barclays says its proceeds will be used to finance and refinance mortgages on residential mortgages on properties in England and Wales based on the overall carbon intensity of the underlying property. In December, Barclays launched a further suite of Green Finance products, including loans specifically targeted at green projects and green innovation finance backed by the European Investment Fund, aimed at providing funding for small and medium enterprises.
100.We heard calls from Barclays and the London Stock Exchange for tax breaks and incentives to encourage greater green bond issuance in the UK. In its submission, the London Stock Exchange Group argued that fiscal incentives and exemptions would support the UK’s status as a destination for green bond issuance. It suggested:
101.Steve Waygood from Aviva, however, was sceptical about the value of green bonds as a means of mobilising capital into green infrastructure:
I believe green bonds are also a distraction to some extent. We need to bear in mind that they are refinancing mechanisms almost all the time, so the infrastructure already exists. It is important that they can refinance and lower their cost of capital, but people look at the £100 billion green bond market and assume that £100 billion has gone into green infrastructure that year. It is not the case.
102.On 28 March 2018, the industry-led Green Finance Taskforce established by the Clean Growth Strategy published a report recommending that the UK Government should follow France in issuing a Sovereign Green Bond. The Taskforce says that a UK Sovereign Green Bond Framework should be designed to reflect the targets set out in the Clean Growth Strategy and 25-Year Environment Plan ‘and channel low-cost, patient capital towards selected qualifying green projects’. The Taskforce highlighted that it must be made clear that the proceeds ‘amount to additional sources of capital, invested in new green projects that might otherwise not have been funded.’
103.To list on the London Stock Exchange, green bond issuers are currently required to provide independent certification by an experienced third-party certification provider, but there are other green bonds that are self-certified. Several submissions pointed to the need for better certification and data to demonstrate the environmental credentials of green bonds. WWF argued that some form of sustainability disclosure was required on the bond market in order to evaluate the additionality achieved by green bonds. It has previously warned that a lack of agreed standards has led to the risk of ‘greenwashing’ where bonds labelled as green only achieve minor or ‘in fact no actual environmental benefits’.
104.The Institute for Sustainable Resources at University College London said that more reliable and detailed data disclosure is required to boost the development of the green bond market. It said that the MSCI Green Bonds Index is the only credible green bond index, as many others rely on whether the issuer calls a bond ‘green’ or not. It warned that the Green Bond Principles only provides an indicative list of what constitutes ‘green’. It says that further standardisation of green bond definitions, structures and reporting would be beneficial for three reasons:
105.The Climate Bonds Initiative talked about the importance of certification during the first hearing for this inquiry:
Diletta Giuliani: We have found that green bonds are a great way to start a whole green finance strategy. When we look at green bonds, it immediately calls for green labelling, a definition of what is green, which is the first step in implementing any green finance strategy.
106.The London Stock Exchange Group argued that while robust certification was important, overburdening business could be counterproductive:
David Harris: There is a difficult balancing act here. On the one hand, what is really important is that you have credibility around the green bonds standards. You also need not to overburden green bond issuers. Because, if you make the requirements too onerous and costly, it becomes too expensive and they won’t bother. […] The approach we are taking to ensure that we have got credibility behind green bond issuance is that to be admitted on to the green bond segments of the LSE you have to have independent certification.
107.In March 2018, the EU published its Action Plan on Sustainable Finance, drawing on the recommendations of the High-Level Expert Group (HLEG) on Sustainable Finance. The Action Plan proposes a number of reforms that are relevant to the UK Government’s ambitions in the Clean Growth Strategy. For example the EU plans to:
108.In its submission, the Government said that:
Efforts to align the EU and UK green finance agenda have already positively translated into more targeted UK green finance policy. For example, the UK has commissioned the British Standards Institution (BSI) to develop the world’s first green finance management standards. The BSI will specifically not be developing ‘green’ taxonomies as part of this work, in recognition of the progress already being made in this area by the EU HLEG.
109.Aviva’s Steve Waygood praised the Government announcement on standards:
One of the things that I would applaud in the Clean Growth Strategy is the reference to the British Standards Institution creating a set of standards for sustainable finance, so that the end investor can see whether their financial investments are sustainable. Think of it as a ‘Fairtrade for finance’. We have seen what happened to the coffee sector and chocolate and others, where a standard is created it actually gives voice to a mechanism for the latent demand that we know to be out there. It gives them a quick and easy way of seeing whether the claims that people are making here—and there are a huge number of claims by financial institutions for being sustainable—the standard enables the end consumer to know whether it is true or not.
110.Standards, such as those developed by the British Standards Institution (BSI), provide an established non-statutory mechanism for credible and robust reporting on environmental performance. One example of this is the internationally agreed environmental management standard ISO 14001, which is designed to help organisations improve environmental performance through more efficient use of resources and reduction of waste.
111.Given the Clean Growth Strategy’s pledge that the Government would be working with the BSI on green finance standards, we were surprised to hear the Economic Secretary to the Treasury John Glen MP explain that the Government does not plan to develop standards for green bonds:
There seems to be a number of market initiatives to examine and set out what a green bond looks like. There are no plans at the moment to develop new regulatory and definitional properties of a green bond.
112.If green bonds make additional capital available for low-carbon or sustainable projects then they could have transformational public benefits. We can therefore see a case for incentives to encourage financial institutions and owners of UK assets to issue green bonds, but only once clearly defined standards are in place. It is crucial that investors and policy makers can have confidence in green bonds, before taxpayers’ money is used to subsidise bond issuance by financial institutions.
113.Ministers must outline a timetable for the introduction of authoritative standards on green financial products—including bonds—that can give investors’ confidence they provide additional green benefits. Liaising with our EU partners will be necessary to ensure that the UK’s efforts in this cohere with the proposals set out in the Commission’s Action Plan on Sustainable Finance. If Europe-wide standards are adopted, it would make sense to continue to utilise them after we leave the EU.
114.The Green Finance Taskforce’s proposal of issuing a Sovereign Green Bond to drive investment into clean growth presents a good opportunity for the Government to set a benchmark of good practice and high standards for domestic issuance of green bonds. If additionality is ensured then this could be a useful mechanism to direct investment into projects to deliver our carbon budgets and other environmental objectives. It may have a greater role to play if a future relationship with the EIB cannot be negotiated.
115.The Government should explore how a Sovereign Green Bond could be directly tied to achieving its Clean Growth Strategy and include its analysis in the delivery plan it must bring forward in time for Budget 2018 to show how it intends to plug the shortfall in achieving our fourth and fifth carbon budgets.
129 Department for Business Energy and Industrial Strategy, (October 2017)
130 Department for Business Energy and Industrial Strategy, (October 2017)
131 Green Finance Taskforce, (March 2018)
132 Grantham Institute (GFI0001)
133 Grantham Institute (GFI0001)
137 London Stock Exchange Group (GFI0021)
138 London Stock Exchange Group (GFI0021)
140 Email to the committee from the Climate Bonds Initiative (January 2018)
143 London Stock Exchange Group (GFI0021)
145 Green Finance Taskforce, (March 2018)
146 Green Finance Taskforce, (March 2018)
147 Green Finance Taskforce, (March 2018)
149 WWF (GFI0022)
152 Institute for Sustainable Resources, University College London (GFI0020)
153 Institute for Sustainable Resources, University College London (GFI0020)
156 European Commission, (March 2018)
157 HM Treasury and BEIS (GFI0028)
160 British Standards Institute (ENP0070)
161 British Standards Institute (ENP0070)
Published: 16 May 2018