How Boris Johnson Can Defend the City of London
(Bloomberg Opinion) -- As the prospect of Britain leaving the European Union without a deal grows ever more likely, the City of London’s status as the center of European finance is in increasing jeopardy. The Square Mile is also missing out on the chance to lead the charge into one of the hottest new products in finance, in part because of the government’s reluctance to participate in the mini-revolution.
By the beginning of this month, more than $100 billion of green bonds had been sold globally, up from $70 billion at the same point last year and on pace to top last year’s record $134 billion of issuance. While the sector is still small in comparison with the $2.6 trillion of international bonds issued this year, it has doubled in size in just two years — and with the climate crisis becoming more apparent with every temperature record that gets broken, its future trajectory is clear.
Countries including Chile, Poland and the Netherlands have all sold debt designed to finance environmentally friendly projects. France has been at the forefront of developing the market for green bonds issued by governments; as a result, its banks are at the top of the global league tables for underwriting sales of this kind of debt for both nations and companies. Credit Agricole SA, BNP Paribas SA and Societe Generale SA enjoy a combined market share of almost 15%.
The U.K.’s sole representative in the top 10 rankings is HSBC Holdings Plc — which has seriously considered shifting its head office to Asia, where it makes most of its revenue. That’s a sorry state of affairs given London’s record of being at the vanguard of developing new financial products. And that poor showing is because the U.K. is notably absent from the list of governments that have issued the bonds.
The Debt Management Office, which is responsible for U.K. gilt sales, referred me to the government’s Green Finance Strategy report published earlier this month. While that report acknowledges the importance of the continued “mainstreaming of green finance products,” it dismisses the idea of a sovereign issue:
The Government does not consider a sovereign green bond to be value for money compared to the core gilt program, which remains the most stable and cost-effective way of raising finance to fund day-to-day government activities.The Government remains open to the introduction of new debt financing instruments but would need to be satisfied that any new instrument would meet value for money criteria, enjoy strong and sustained demand in the long-term and be consistent with the wider fiscal objectives of government.
That reluctance strikes me as shortsighted. Admittedly, the Dutch government’s 6 billion euros ($6.7 billion) of 20-year green bonds sold in May yield more than a slightly longer-dated 22-year vanilla issue. But the average gap of fewer than 5 basis points in the past two months is negligible.
Moreover, given that the U.K. report also talks about the need for Britain “to consolidate its reputation as the home of the green finance professional and to capture the commercial opportunities” from the growth of the global market for environmentally friendly securities, a tiny increase in interest payments seems — literally — a small price to pay.
Back in the day, it was the U.K. and the Bank of England that took the lead in transformative financial innovations. Bankers in London invented the Eurobond market, which became one of the primary sources of finance for companies and governments worldwide. The now discredited London interbank offered rates were the most important benchmarks of borrowing costs.
When it became clear that Europe was serious about introducing a common currency, it was the U.K. central bank that did much of the groundwork. Back in 1991, Britain issued the biggest benchmark bond denominated in European currency units, the euro’s forerunner, as a way of cementing London’s role in the development of the new currency — a victory that still rankles with Paris.
And half a decade ago, the U.K. was determined to become the first nation other than China to sell a bond denominated in renminbi as financial centers vied to become the offshore trading hub for Beijing’s currency. Those yuan bonds were repaid almost two years ago.
Prior to entering Parliament, the newly installed chancellor of the exchequer, Sajid Javid, was a managing director at Deutsche Bank AG. So he, of all politicians, should appreciate that the City needs to grasp any and every opportunity to position itself for a post-Brexit world. Prime Minister Boris Johnson should allow him to instruct the DMO to embrace green bonds as a relatively cheap way to put London in the mix — and the sooner, the better.
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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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