Some UK bond investors see demand for 'green gilts', DMO says

LONDON (Reuters) - Investors in British government bonds are showing some appetite for "green gilts" that would be used to fund environmental projects, the United Kingdom Debt Management Office (DMO) said on Tuesday.

Both primary dealers -- banks appointed to help to create a market for gilts -- and investors had expressed support for green versions of the bonds, minutes from their meetings with the DMO showed.

While Britain was one of the first countries to roll out inflation-linked government bonds in 1981, and was the first Western government to issue an Islamic bond in 2014, other countries have moved faster in recent years to capitalise on a booming market for sustainable finance.

Last month, Germany and Italy announced plans to launch their first green bond issues in the second half of 2020. Ireland already issues green bonds.

"A few attendees reported growing interest from their clients in government issuance of green bonds and suggested this possibility should be considered in the coming financial year," the DMO said of its meeting with primary dealers.

It also noted "some support" for green gilts from its meeting with investors in London.

British finance minister Sajid Javid publishes his first budget on March 11. Plans for the issuance of gilts during the 2020/21 financial year starting in April will also be published that day.

Earlier this month, the head of Britain's DMO, Robert Stheeman, told the Financial Times he had doubts about whether a green gilt issuance programme would be cost-effective, as investors might demand a premium relative to normal gilts due to the lack of liquidity in what would be a small market.

The DMO said investors also expressed interest in inflation-linked gilts tied to the consumer price index, rather than the outdated retail price index.

Britain's government has delayed until after March's budget a consultation to decide when it should fix the flawed RPI.

More than a quarter of British government bonds, worth around 450 billion pounds ($591 billion), are linked to the Retail Prices Index (RPI) which runs higher than other measures of inflation, meaning investors receive an estimated windfall of 1 billion pounds a year.

Some pension fund investors, who use inflation-linked gilts to match their liabilities, told the DMO that the lack of clarity around the timing of reform to RPI could cause problems.

Last year Stheeman said stopping the issuance of government bonds linked to the "flawed" RPI measure of inflation would not save British taxpayers' money.

(Reporting by Andy Bruce, editing by Pritha Sarkar)