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The City of London Is Late to a Bond Market Party

(Bloomberg Opinion) -- The U.K. government is finally adding green to the shades of gilts available to fixed-income investors. It’s unfashionably late to a party that’s been in full swing for several years. And its tardiness means a missed opportunity for the City of London to dominate an area of finance that will only increase in importance.

Sales of green bonds — debt whose proceeds are used to finance environmentally friendly projects — have soared in recent years. Asset management firms are under increasing pressure from customers to demonstrate that their capital isn’t being allocated to activities that damage the planet, so there’s a ready source of demand. Pacific Investment Management Co., for example, launched a bond fund last month that it said was dedicated to finding “the likely winners of the transition to a net zero carbon economy.”

Other nations have been quicker than the U.K. to take advantage of that growing appetite. France has led the pack, with a bond it first sold in January 2017 now the biggest in the market at more than 27 billion euros ($32 billion). In September, Germany’s debut green bond attracted 33 billion euros of bids for 6.5 billion euros of 10-year securities. The European Union has announced that green debt will comprise about 225 billion euros of the 750 billion euros it plans to raise for its pandemic recovery fund.

JPMorgan Chase & Co. dominates the league table of green bond underwriters, managing about 6.5% of 2020’s worldwide sales. But French banks fill out the next two of the top three slots, with BNP Paribas SA and Credit Agricole SA coming in second and third, respectively, each with about 5.3% of this year’s deals. London-based banks Barclays Plc and HSBC Holdings Plc trail in fourth and fifth place, each with less than 4.5% of the new issues business.

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The City has been pleading with the U.K. to enter the green market. Some 32 firms with more than $13 trillion of assets, ranging from Schroders Plc to NatWest Group Plc, backed a “Green+ Gilt” proposal submitted to the Treasury last month. As Britain prepares to leave the EU, London needs to hang on to as much capital markets activity as possible. Moreover, with the U.K. chairing the Group of Seven industrialized nations in 2021, it’s an auspicious time to get its green act together.

Issuing green debt might even save the government money as it widens the net of eligible investors particularly from ethical and ESG-related bond funds. But just as importantly it will pave the way for other U.K. borrowers to get with the program and tap into green finance too. For example, Daimler AG raised 1 billion euros by selling 10-year green bonds the day after Germany’s inaugural green government bund. It really does pay to set the right example.

In order to attract the biggest following, it makes sense if the U.K. creates a green syndicated benchmark in the five- to 10-year part of the curve as this is where the bulk of corporate issuance is sold. That would maximize the benefits of creating a greener bond world in the City of London as part of its gambit to remain the center of European finance after Brexit.

Britain, though, is still dragging its feet. The first green gilt sales won’t arrive until next year, Chancellor of the Exchequer Rishi Sunak said Monday. By then, Germany will already have five-, 10- and 30-year issues in circulation. Sunak’s plans to make it mandatory for companies to disclose their exposure to climate-change risks by 2025 will burnish the U.K.’s green credentials as it prepares to host a series of United Nations meetings on the climate emergency next year. But by delaying further, he’s missing the chance to make London the hub of green capital markets in Europe.

So two cheers for the green gilts. They’re an idea whose time is long overdue. If only the government had acted sooner.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."

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