Rishi Sunak is being urged to issue a new generation of green bonds that would offer higher returns to investors if the UK government fails to meet its climate change targets.

the Social Market Foundation (SMF) said its sustainability bond plan would provide further incentive for ministers to meet carbon reduction targets and help boost the UK’s prospects of being a global financial center for green finance.

A report to be released by the think tank on Tuesday calls on the chancellor to follow the example of Chile, the first country to link the borrowing costs of its public debt to the fight against global warming.

Scott Corfe, Research Director at SMF, said: “Financial services will be key to achieving net zero emissions, and green finance could be one of Britain’s great economic success stories in the 2020s. 200,000 financial services workers are in green jobs – a number that will no doubt increase over the next few years.

“The government must work in partnership with the financial services sector to make Britain the leading center for finance linked to sustainable development. Leading by example, the chancellor is expected to issue a new generation of sustainability-linked government bonds that would tie interest payments to the country’s net zero goals. Not only would this support green financial services, but the prospect of financial penalties for failing to meet net zero targets would reinforce the government’s commitment to decarbonisation.

Corfe said Sunak should start small in order to test investor interest, but added that the Chilean example suggests demand will be high.

In March, Chile issued a $2bn (£1.6bn) sustainability bond, which was oversubscribed four times. Returns for investors depend on the country meeting its climate change commitments, including that it emit no more than 95 metric tons of carbon dioxide or the equivalent by 2030, and that energy renewables will account for 60% of electricity production by 2032. If Chile misses a target, it incurs a financial penalty.

Sunak is keen for London to be a center for green finance and last year announced a scheme where proceeds from green bonds would be used for environmental projects. The Treasury said two bond issues had already raised £16bn, but it would need to be confident that new forms of funding would drive strong and sustained demand and represent good value for taxpayers.

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“The UK is a global leader in green finance and the Chancellor set a clear path at COP26 for the UK to become the world’s first net zero aligned financial centre,” a spokesperson said. of the Treasury.

The SMF said issuing a sustainability-linked bond would show the government was “fully committed” to decarbonisation. The threat of financial penalties for over-promising and under-delivering could prove “a powerful way to hold the government to its word on net zero.”

The interest rate, or coupon, of a standard government bond is set when it is auctioned to investors, with interest rates on index-linked bonds adjusting for inflation.