River and Mercantile : R&M participates in inaugural green gilt issuance

The Derivatives team at R&M will start to incorporate green gilts in client portfolios as part of the firm's LDI strategy, based either on clients' preferences as asset owners, or R&M's own view.

Mark Davies, Managing Director, Derivatives at River and Mercantile, said: "As the manager of pension schemes' liability hedges, we believe that green gilts offer pension schemes a potentially low-cost and simple governance approach to demonstrate a contribution towards meeting the Paris Agreement, as we know they will be directly invested into green projects."

Ronan O'Riordan, Head of Business Development at River and Mercantile Solutions, added: "Trustees should consider how green gilts might fit in with their schemes' investment objectives, as well as their ESG objectives and beliefs. Large pension schemes need to report on climate risks from 2021, so trustees may consider that an investment in green gilts would fit well with management of their climate risks. It is a fantastic development for UK pension schemes to now be able to reflect their ESG beliefs in their Liability Hedging portfolios and we want to continue to work with our clients on ESG."

Participation and pricing

It has been possible for R&M to participate in the green gilt issuance by swapping out of non-green gilts of a similar maturity. R&M only considered a switch under circumstances when the price difference was attractive enough but any "greenium" (reduction in yield of green gilts vs non-green) was small enough that the impact of the yield difference will be minimal at a total portfolio level.

Background

The issuance of the UK's first sovereign Green Gilt is part of the government's aim to build out a green curve over the coming years to meet growing investor demand and to help fund projects to tackle climate change, finance much-needed infrastructure investment, and create jobs across the country. £10 billion was raised from the sale of the Gilt on 21 September 2022. This will be followed by a second issuance later in the year. Green Gilts will raise a minimum of £15 billion for green government projects this financial year.