UK green bond issuance: still a grey area

I was proud to launch our latest Economic Research report last week – it’s the second output of a collaboration between TheCityUK and Imperial College Business School’s Centre for Climate Finance and Investment.

Our new report, ‘Understanding green bonds’, builds on the broader research on green finance that we published last year, which I wrote about in an earlier blog post.

Like our green finance report, our latest research is aimed at a general, non-specialist audience. It serves as a sort of primer on green bonds, exploring what they are, what sets them apart from regular bonds, who buys and sells them, and what the main issues are around the market’s future development.

One of the most interesting areas of analysis is the geographic spread of green bond issuance. China is the global leader in this rapidly growing market, as measured by cumulative issuance value between 2010 and early 2018. Its $66bn in issuance is more than 1.5 times more than issuance by the next-most-prolific country, France ($41bn). Although several other European countries feature prominently in this list, the UK—unusually given its position as the world’s leading international financial and related professional services centre—had a mere $3bn in cumulative issuance.

In thinking about the UK’s position in the market, we found that sterling accounts for a very small proportion of green bonds—in general, and even on the London Stock Exchange (LSE):

Figure 5

Our calculations based on LSE data show that as of end-2017, just 9.4% of green bonds listed on the LSE were denominated in sterling. Although it is tempting to see sterling-denominated issuance as a proxy for UK-based green bond issuance, that approach can be misleading. For one thing, sterling-denominated bond issuance is relatively limited even for conventional bonds; sterling-denominated bonds comprise less than 40% of the total number of bonds listed on LSE markets. For another thing, a focus on currencies masks a broader theme, which is the relative lack of appetite that UK companies have displayed to date in issuing green bonds. Despite some high-profile issues from the likes of Anglian Water, Barclays and Transport for London, only around 17% of green bonds listed on the LSE are from UK-domiciled entities. Finally, it’s worth remembering that even among developed-country firms issuing debt in hard currency, there isn’t always a perfect correlation between domicile, place of issue, and currency of issue. Barclays LSE-listed green bond issue in November 2017, for example, was denominated in euros.

Our report noted that there is still a ways to go to gain a fuller understanding of the supply-demand dynamics of the green bond market. As we explore these issues further in future research, we hope the insights we gain will also help explain what conditions or policies would help bolster UK participation in one of the fastest-growing segments of finance today.