Investing in Scotland's Net Zero ambition: Green Bonds

Banking and Finance partner, Tony Cameron, asks whether the Scottish Government is poised to introduce Green Bonds in the third article in our green finance series.

Green Bonds

Dubbed “kilts” instead of “gilts”, green bonds may be introduced as part of the Scottish Government’s Global Capital Investment Plan strategy to “work in partnership with the markets”.

The Scottish Government had historically looked at a bond programme as part of infrastructure investment to replace PFI/PPP but it did not have the requisite powers to issue bonds at that time. Although such power was introduced after the unsuccessful independence referendum in 2014, it has not yet been used and the perception is that it has not been seen as financially attractive.

Now, however, as well as the reference in the Global Capital Investment Plan, there is increasing commentary in the press that the Scottish Government is looking seriously at this as an option to boost the ESG agenda, in particular due to the global focus on ESG and COP26 in Glasgow in November 2021. The UK Government is also due to issue its first Sovereign Green Bond, or green gilt, this year.

Clearly, a key issue to navigate in the issue of Scottish Green Bonds will be the potential for Scottish independence (especially after the SNP victory in May’s Scottish elections) and the impact of that on the pricing of such bonds.

The concept of sub national sovereign debt is not unusual (the Free State of Bavaria is a recent example, as well as the more developed municipal debt market in the US) but whilst, like Scotland, there may be no underpinning of any bonds by national government, there tends to be an attraction in such bonds due to a higher yield and a perception that the national government would not allow a failure.

The issue for Scotland is effectively the pricing of sub national sovereign debt which may ultimately become sovereign debt and the yield that would need to apply. The currency discussion which beset the last independence campaign will also be relevant.

That said, the “green element” to the bonds may make these more attractive to investors than would otherwise be the case and may mean that the Scottish Government is more likely to press on notwithstanding the higher costs of this funding, so as to push this agenda.

The new power-sharing agreement between the Scottish Government and Scottish Green Party may also be an interesting dynamic in this respect as the Green Party now holds a role in government for the first time, due to the SNP being just short of an overall majority.

Without going into detail here, the concept of local community or municipal bond programmes, building on the type of ethical crowdfunding that has been developed by entities such as Abundance, is also an interesting bond model to help the flight of capital into green projects too.