Green bonds: leveraging sustainable finance to accelerate the net zero transition

Net Zero and the Public Sector

Public sector organisations in 2024 are set to face increasing scrutiny on disclosures around how they’re tackling environmental, social and governance (ESG) issues. The UK is committed to achieving net zero - the balance of total greenhouse gas (GHG) emissions to total GHG removed from the atmosphere - by 2050. Alongside specific public sector targets to cut direct GHG emissions from buildings by 50% and 75% by 2032 and 2037 respectively (from a 2017 baseline level), there's no room for lacklustre or empty commitments to sustainability.

Public sector buildings contribute 2.3% of the UK’s total CO2 emissions, mainly from natural gas heating¹. Despite receiving £2.5 billion in Government funding from FY2020/21 to FY2024/25 through the Public Sector Decarbonisation Scheme, committed funding for the public sector only covers 80% of necessary funding within this period². A significant increase in investment will be needed to meet the 2037 goal.

Sustainable finance is key to bridging this gap, raising and directing investments towards technologies or projects that contribute to emissions reductions. The UK Government’s 2023 ‘Green Finance Strategy’ outlines the steps needed for the UK to become the world’s first Net Zero-aligned Financial Centre, including:

Implementing a UK Green Taxonomy: a framework for defining which economic activities can be labelled as ‘green’. The independent Green Technical Advisory Group completed its advisory mandate to the Government in October 2023, setting out the scope, reporting alignments and key performance indicator (KPI) sequencing of the Taxonomy. Government consultation on the Taxonomy was further delayed in Q3 2023 and is now expected to publish sometime in 2024.
Adopting International Financial Reporting Standards (IFRS): the UK has since committed to mandatory reporting aligned with the International Sustainability Standards Board (ISSB) IFRS on sustainability-linked financial (‘S1’) and climate-related (‘S2’) risks and opportunities. The Financial Conduct Authority (FCA) plans to integrate these standards into UK regulation on or after 1 January 2025. Other issue-specific standards and guidance to augment the general and climate-focused foundation created by S1 and S2.

Green Bonds in Numbers: 2023 Q4³ ⁴

Global issuance of green bonds in 2023 amounted to $576 billion, up from $523 billion the previous year.
Europe has the largest regional share (45%) of global sustainable bond issuance, followed by Asia (23%) and North America (12%). Sustainable bonds include green bonds as well as other labels, namely social, sustainability, sustainability-linked, and transition bonds.
Public sector green bond issuances (municipal and sovereign) make up 23% of total global sustainable bond issuances.
In 2023 Q4 alone, $60 billion worth of global public sector sustainable bonds were issued; 65% of sustainable bond issuances in Q4 were green bonds.
January 2024 saw record sales in sustainable bonds at $149.5 billion.

Green Bonds and the Public Sector

Green bonds, once a niche market, have become a key mechanism for mobilising funds towards environmental projects. They can be appealing for investors seeking a pathway to contribute to sustainable initiatives while receiving returns comparable to traditional ‘vanilla’ bonds.

Green bonds provide public sector organisations three key benefits. First, they supply a dedicated source of capital for environmentally sustainable projects. The Use of Proceeds (UoP) of this targeted financing can be externally reviewed through second-party opinions or third-party assurance from independent audit or advisory organisations with the required expertise (such as BDO UK).

Second, there are potentially lower borrowing costs and favourable terms involved compared to conventional debt issuance. Historically, green bonds have displayed a green premium, or ‘greenium’ — investors are more likely to accept lower returns on a green bond than an equivalent vanilla bond because they recognise the value and impact of the environmental projects which they are financing. Therefore, the eventual outlay of the green issuer would be less than their vanilla counterpart.

Third, green bonds offer organisations a significant opportunity to enhance their reputation and sustainability credentials. By clearly highlighting funding mechanisms and frameworks in place to meet net zero pledges, as well as to ensure regulatory compliance, issuances can help bolster public trust and confidence in the public sector’s wider commitment to environmental stewardship.

So, how are public sector organisations currently engaging with green bonds? This is hopefully now a question one will bear in mind after reading this article when considering financial opportunities in the sector. Here are a couple of notable yet different examples which may form the groundwork for future public sector issuances:

Maidstone and Tunbridge Wells NHS (National Health Service) Trust: in May 2022, Just Group forward funded £27 million in investment into an NHS green bond to develop a 144-bedroom purpose-built student accommodation, academic learning hub and ancillary plant/services. Here, the UoP was towards ‘Green Buildings’, ensuring that the accommodation was ‘Excellent’ under BREEAM (Building Research Establishment Environment Assessment Method) certification. For more information on the NHS’s net zero pathway, please read our previous article here.
National Savings & Investments (NS&I): in October 2021, the state-owned savings bank issued its first Green Savings bond - a three-year fixed savings account whose proceeds will be used by the Government to give to environmental projects such as offshore wind farm development or upgrading public transport. Currently on Issue 7 (2.95% gross/AER), over £915 million has been invested in Green Savings Bonds since its debut, up from just £288 million last year.

How BDO can Help

Environmental Sustainability Reviews

We have significant experience of undertaking reviews into NHS organisations’ approach to environmental sustainability. This includes assessing governance structures, performance monitoring, and evaluating risks in context of the specific organisation’s activities.

We also review the approach taken to develop Green Plans and to meet Standard Contract requirements.

Partnership Working

We have extensive experience of working with ICBs and providers on their approach to partnership working. Our team also consists of clinical, organisational culture, soft controls, equity, diversity, and inclusion (ED&I) specialists, and we use an integrated approach that is tailored to the local context.

Outsourced Internal Audit Services

We provide internal audit services to a significant number of NHS Trusts and ICBs. As part of this, we consider Environment, Social, and Governance (ESG) risks in every single audit we undertake. We understand the role that every service, department, and individual has in contributing to your organisational goals for environmental sustainability and can provide assurance throughout the internal audit provision.

In-house Sustainability & ESG Advisory Expertise

We work with our colleagues in the Sustainability & ESG Hub within Advisory to ensure that our services are aligned to the needs of our clients and the emerging regulatory and commercial backdrop. The Hub can help to create and protect the value that arises from how public sector organisations address the full range of ESG issues and regulations.

As the green finance momentum continues, issuers will need expert advice to help them navigate the fast-moving regulatory shifts and ensure their products comply with applicable standards.

In addition, the scrutiny of sustainable finance products will heighten as the urgency of the climate transition intensifies. A credible, independent advisor can aid in the successful placement of the products, enhancing a fund-raising strategy.

References

1. 2022 UK greenhouse gas emissions: provisional figures - statistical release (publishing.service.gov.uk)

2. Progress in reducing UK emissions - 2023 Report to Parliament (theccc.org.uk)

3. Environmental Finance Data (efdata.org)

4. Global ESG Bond Sales Reach $150 Billion in Busiest January Ever - Bloomberg