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UK government urged to stretch to sustainability-linked Gilts

Major UK fixed income manager Insight Investment has called on the UK government to go beyond green bonds to issue a sustainability-linked bond, a move that Federated Hermes also said it would argue for.
The Chancellor’s Budget announcement tomorrow is…

Major UK fixed income manager Insight Investment has called on the UK government to go beyond green bonds to issue a sustainability-linked bond, a move that Federated Hermes also said it would argue for. The Chancellor's Budget announcement tomorrow is expected to provide some further detail on the UK government's plan to issue its first green Gilt. Joshua Kendall, head of responsible investment at Insight, said the manager was looking forward to finding out more about the green bond, such as the size and maturity, but he also said Insight "would urge the UK government to take a creative and leading role" by also considering issuing other forms of sustainability-related debt.

Sustainability-linked Gilts, Kendall said, "would help the UK government demonstrate its accountability by aligning sustainability KPIs with the structure and payments of a Gilt". "No government has yet issued a sustainability-linked bond and we strongly believe this would be a credible way for the UK government to demonstrate its commitment to making a meaningful difference ahead of hosting COP26 later this year," Kendall added. Sustainability-linked bonds are bonds with coupons linked to sustainability performance targets and, in contrast with use-of-proceed bonds such as green bonds, raise money for general corporate purposes rather than for defined projects or categories of activity.

Federated Hermes is a supporter of sustainability-linked bonds, and Eoin Murray, its head of investment, said the asset manager would argue strongly for the deployment of sustainability-linked bonds by the government, particularly if sustainability is linked to outcomes rather than specific projects. "We would also advocate for climate and biodiversity to be embedded within performance-linked bonds," he added. "Establishing a full-blown nature and climate sovereign bond facility will enable a robust scaling of nature- and climate-linked sovereign debt across diverse policy environments, contexts and needs. It will integrate nature and climate goals into performance objectives, improving the cost of capital and targeting specific outcomes."

Murray also said enormous benefits would accrue from "promoting the standardisation of nature and climate performance outcomes through systematic data collection, analysis and verification".

Murray also called on the Chancellor to announce a green steel investment, emulating progress being made in Sweden with the encouragment of its energy agency, and for the government to embrace a measure of economic growth that also captured societal wellbeing.

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