The UK’s Green Gilt is Marketing Puff and a Pointless Distraction

Blain’s Morning Porridge – 22 September 2021: The UK’s Green Gilt is Marketing Puff and a Pointless Distraction

“Every decent con man knows a simple truth is more powerful than an elaborate lie..”

This morning: The UK attracted a record £137 bln order book for its £10 bln Green Gilt. But what does the Green Gilt achieve? Its marketing puff. It may disguise how ill-considered and ultimately self-defeating the Government’s rush to looking green has been. No matter how well intentioned a Green Gilt is – its style over substance, papering over the cracks in a confused and contradictory long-term climate-change mitigation strategy.  

It fills my heart with joy and makes me proud to be British that the UK Government just received £137 billion of orders for its debut Green Bond – a record historical amount for any UK bond or Green Bond. (US Readers… disinterested sarcasm alert.)

Investors were apparently tumbling over themselves to place orders, but I can’t say many will be surprised or disappointed when they got less than 7% of their order. The £10 bln Green Gilt due in 2033 (12 year) will pay a 0.875% and was priced to yield 0.8721%… which is a bit more than the comparable 11year bond was paying at the time….

The proceeds of the new Green Gilt will specifically be earmarked to support green projects including zero-emission transport and offshore wind projects. I don’t quite understand how the spending programme will actually work. I was taught Government funding could not be “hypothecated” (allocated against a specific project or asset) because that would result in political bargaining against good and bad projects, akin to US Pork Barrelling where project money is spent to buy votes.

I guess the government must have a very clever super-computer allocating the nice new green coloured pixelated money into a good digital pot that only green civil servants can open to save the planet, while nasty normal money raised from unclean gilts – to fund stuff like building nuclear submarines to sell to Australia to defend Australia’s export chains to China from China – go into a more general dirty digital wallet? (US Readers – mild sarcasm alert.)

It would be churlish of me to suggest the only meaningful thing the £10 bln Gilt issue actually does… is reduce the remaining amount of Gilts the UK’s Debt Management Office has to fund this year by about…. let me see if I can work it out… about £10 bln. (Oh, less the marketing and placement fees the govt paid to the banks who lead the deal after persuading Chancellor Rishi Sunak that it would be a brilliant idea for the UK to issue Green Gilts.)

It’s reckoned the “greenium” (the premium) the Green Gilt achieved in terms of a lower yield was about 2.5 pence in every hundred pounds – 2.5 basis points. This translates to a saving of around $28 mm pounds in interest rate costs through the life of the bond. Effectively, doing a Green Bond means we got 47 minutes of UK government spending for free! Fantastic…. (Barf…)

Oh, and Alok Sharma will be terribly pleased. He is chairing COP26 in November, and will be able to smile and point out how the UK is saving the planet by issuing Green Bonds, and that our green bond is bigger and juicer than Italy’s Green Bond….

I would have been much more impressed if Richy-Rich Sunak had stood up and made honest pledges about how well-considered and properly connected government spending on climate mitigation is a critical objective across all government spending programmes. If he’s as smart as folk seem to think, he’d have been explaining to us that difficult decisions on what can be done immediately, tomorrow and long-term need to be taken. Some of these could look counter-intuitive at first – like a greater reliance on Gas for the next 30-years as the nation’s power infrastructure is re-invented for a carbon neutral age.

Such an honest approach would have been way better way than gesture politics like a Green Gilt.

Regular readers will be aware Green Bonds impress me slightly less than a raindrop on a rainy day. They are marketing chuff. Some evil banker came up with the idea and persuaded issuers that investors were just desperate to buy anything labelled green, while persuading these same institutional fund managers that their investors were equally desperate to invest in green funds. And thus was spawned the market… (The reality now is retail investors and small savers are faced with a growing plethora of notionally green, but lower yielding funds.)

The madness is further illustrated by the number funds now adopting “do-goodyism”. Recently a large fund active in commodities turned down one of my alternative asset ideas on the basis its “too oily for us these days”. They said they’d rather go buy wind-farms because that’s what their investors want. I pointed out that since everyone now wants to own wind-farms to show-off how green they are, the minimal yields on windmills no longer reflect a sensible risk-return, while anything oil-related (even though its effectively carbon-neutral) offers a superb return and are fully climate mitigated!

The reality – as any good bond fund manager knows – is green investments depend not on what the label says, but what the money is actually doing and how it is governed and managed.

When it comes to the UK’s ability to manage and govern its green spending… Lord preserve us. The way in which the UK has rushed into Green spending and Climate Change mitigation has been about as joined up as a full stop on a blank page.

Let’s take the current energy crisis where the UK has “sagely” reduced our gas storage reserves to 1% of yearly need. 3 cold winter days and the UK could run out of power. “Not a problem” says Government – “we can buy it from Yoorp”. No. You can’t. Yoorp is short of gas, and Russia will keep it that way. Ah, retorts the energy minister; “we have lots of windfarms and solar power”… yes, but when there is no wind, which happens when the UK is at the centre of a blocking high sucking in the coldest polar winds from Artic Siberia, windfarms don’t work. Oh, and neither does solar when the day is 8 hours long and its cloudy.

(Don’t get me started on offshore wind: looks brilliant on the plans, the due diligence data room and financial projections till you discover trying to replace a broken or cracked turbine blade offshore is massively difficult in a storm, and that booking a boat to do the work from makes it economic to leave it broken till such a time as more boats become available – like next summer, or the summer after that… An engineer could have told you that, but engineers are too clever to work in fund management.)

Of course, the UK does have utterly reliable and predictable alternative clean energy resources. The oceans around us produce some of the strongest tides on the planet. They are utterly regular – around the coast there is always tidal energy surging untamed around us. Yet, trying to secure investment for tidal energy projects is a nightmare. Planners aren’t interested in climate mitigation – only on what it might do to the local lug-worm population. Investors aren’t interested – they need their green investments today, so buy wind, no matter how expensive it is.

Today, tidal power is between 3-5 times more expensive than wind energy. That will change as more project are tested and succeed – but that will take time and money.. which neither private funders or government show much interest in… In their rush to look green, sound green and be seen doing green they are spending on the immediate but less optimal projects like less-efficient-than-promised wind and socially-dirty lithium rather than building a long-term base in reliable renewables include tide and nuclear, encouraging cleaner energy storage systems (better batteries made from less toxic and socially destructive elements), and missing the opportunity to hydrogenise the economy!

But none of that matters, because today The Chancellor will be celebrating a record UK Green Gilt issue, and the investment banks behind it will be counting the fees..

Out of time, and back to the day job

Bill Blain

Strategist, Shard Capital