Green bonds targeted at institutional investors are a key part of new proposals to fund U.K. climate change projects.
The idea comes in plans to form a Green Investment Bank released by a U.K. government commission on Tuesday. The bonds would be similar to existing green bonds issued by the World Bank and the European Investment Bank.
The Green Investment Bank Commission, led by former Merrill Lynch Europe Chairman Bob Wigley, envisages U.K. pension funds and insurance companies potentially allocating up to 5% of their total bond investment to the new bonds.
The commission report estimates that £550 billion ($830 billion) of investment could be required for the U.K. to meet its climate change and renewable energy targets by 2020. It says it’s “critical” to access the vast pools of capital of institutional investors but recognizes this will only happen if institutions can earn adequate risk-adjusted returns and if appropriate market structures are in place.
“The market will need to be deep enough and long-dated enough to provide the necessary liquidity,” the commission says in its 50-page report. “Pension funds and insurance companies will require a good reason to shift from gilts, private equity, venture capital or real estate.”
The idea comes as traditional pension funds are reducing their equity allocation in favor of debt, the report noted. “We believe that a properly structured green bond would be one way of accessing institutional resources,” the report stated, while recognizing that pension trustees approach new investment areas cautiously. “Work needs to start immediately if the capital is to be available in the timeframe required.”
The bonds could be used in two ways — as a means of financing the Green Investment Bank and as a way to lower the cost of debt for projects where the bank or the government provides risk mitigation for the project debt.
The commission says the “plethora” of government bodies in the climate change area and the mixed history of public-private finance initiatives have made projects “too complex” for insurance and pension fund investment. Funds need greater certainty about the legislation governing projects’ returns and more transparency on the funding process and parties involved before they will invest.
Another proposal is for green individual savings accounts, which the commission says would be an “important and visible” way for retail investors to make a contribution to green funding.
Daniel Brooksbank is editor of Responsible Investor