Investors would be paid out more if the government fails to meet its climate targets on decarbonising Britain's economy, a report found.
A new study from the Social Market Foundation (SMF) urged the UK government and chancellor Rishi Sunak to take bolder action to support the UK's "rapidly growing green sector" and meet net zero and other climate commitments.
Britain has committed to reducing greenhouse gas emissions to net zero by 2050.
The think tank recommended issuing bonds linked directly to sustainability, following in the footsteps of Chile. The South American nation recently became the first country in the world to issue sovereign sustainability-linked bonds.
According to SMF estimates, Britain is already home to 200,000 so-called "green jobs" within the finance and insurance industries, making up 19% of all positions in those sectors.
However, the SMF called on the government to take further steps to help pension funds invest in green infrastructure. It noted while £800bn ($1tn) worth of UK pension schemes are aligned with net zero around 70% — valued at £2tn — are yet to commit in this way.
Experts argue that its an "essential step" to take if the UK is to be considered a true world leader on sustainability-tied finance.
"Financial services will be key for delivering on net zero and green finance could be one of Britain’s great economic success stories in the 2020s," said Scott Corfe, SMF research director and one of the report’s authors.
"[The] government needs to work in partnership with the financial services industry to make Britain the leading hub of sustainability-linked finance.
"Not only would this support green financial services, but the prospect of financial penalties for missing net zero targets would strengthen the Government’s commitment to decarbonisation."
Raúl Rosales, co-author of the report and senior executive fellow at Imperial College business school’s Centre for Climate Finance and Investment, said: "We need a carbon tax policy and transition framework to incentivise net zero funds, financial and tax incentives for pension schemes to invest in infrastructure funds and to take the global lead in the space of sustainability linked bonds, all while not compromising the balance sheet of banks."
In 2019, Italian energy group Enel announced a sustainable development goal bond. It issued a $1.5bn five-year bond with a 2.650% coupon, targeting a 55% share of renewables in its power generation capacity by the end of 2021. The coupon will go up by 25 basis-points until the bond matures if it fails to reach its goal.
Separate analysis from manufacturing group Make UK found 65% of manufacturers made a contribution to net zero in the past 12 months, while 35% of businesses have a net zero strategy in place and have started to implement it.