U.K.’s Debt Chief Prefers Going Green Over Borrowing for Century

(Bloomberg) -- Britain’s unprecedented borrowing may require innovative tools from the man responsible for managing it.

Two options that have gained traction elsewhere are bonds with a 100-year maturity and green debt -- issuance tied to the funding of environmental projects. While the former is not being considered by the U.K. Debt Management Office any time soon, the appeal of the latter is growing, according to its Chief Executive Officer Robert Stheeman.

Europe is taking a lead toward a greener economy in pandemic recovery budgets, with Germany planning two such bond issues this year. The key to making that happen in the U.K. would be Parliament passing a bill that seeks pension funds to take the climate into account, including the country’s pledge to cut greenhouse gas emissions to net zero by 2050.

“With any new instrument, the most important thing is actually that there is not just genuine demand, but that demand can incentivize us as a government agency to meet it,” said Stheeman in a telephone interview. “I would definitely not rule anything out.”

The government bill was this week passed by the Lords, Parliament’s upper house. The U.K. is well behind its regional peers in selling green bonds, with France boasting the biggest issuance in a global market worth $68 billion. Poland was the first to issue sovereign green debt in 2016.

The arguments against it focus on the liquidity of such a new market, while conventional government bonds do already fund infrastructure projects in many cases. Still, investor appetite for such securities has grown in recent years.

Stheeman, 61 and who has headed the DMO since 2003, was knighted after helping steer the U.K. through the financial crisis. But it is arguably the coronavirus outbreak that is posing a bigger challenge, given that issuance will likely nearly double the peak in 2010 and future funding needs are uncertain.

The chance of a second wave of the coronavirus and a Brexit cliff-edge at the end of this year further cloud the outlook for both the country’s Treasury and the DMO.

“There is inevitably a heightened level of uncertainty around everything at the moment and that includes government finances and our own plans,” he said.

Britain boasts some of the lowest borrowing costs in the developed world, thanks to its status as a haven and ultra-stimulative policy from the Bank of England. Two-year yields in the nation are below zero and fell under those of Japan -- known for its ultra-low rates -- this week.

Still, Stheeman said that any move to issue 100-year debt to lock in these rates, as Austria most notably has done, is unlikely. The U.K. already boasts an average maturity longer than its developed-market peers and liquidity could prove to be a concern, he added.

“We’re probably not attracted by what I would describe as the ‘trophy’ type of thing, particularly were it to be unnecessarily expensive compared to what we would issue otherwise,” he said. “It’s not obvious to me that 100-year debt would be a very attractive thing. And this is British understatement.”

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