UPDATE 2-UK to sell its first 'green' bond in 2021, Sunak says

(Adds mandatory climate risk disclosures, BoE comments)

LONDON, Nov 9 (Reuters) - Britain will sell its first ‘green’ government bond next year, finance minister Rishi Sunak said on Monday, in a bid to capitalise on growing investor interest in assets designed to fund environmentally-friendly spending.

The market for green bonds has expanded rapidly in recent years with about $250 billion sold globally last year, or 3.5% of global bond issuance.

But Britain’s Debt Management Office, an arm of the finance ministry, has been cautious about green bonds, worrying that investors might demand a higher return for bonds that are issued in small volumes and are less liquid.

Sunak’s announcement marks a change of tack as Britain prepares to host a United Nations climate conference next year. It has also issued a record 373 billion pounds ($490 billion) of bonds since April to fund its response to the COVID-19 pandemic.

“This will be the first in a series of new issuances as we look to build out a green curve over the coming years helping to fund projects to tackle climate change ... and create green jobs across this country,” Sunak told parliament.

He made the announcement as part of a speech on the future of British finance, including how financial regulation would diverge from the European Union’s after Brexit.

Germany, the euro zone’s benchmark issuer of government debt, entered the green bond market for the first time in September, selling 6.5 billion euros of 10-year debt. It plans a five-year bond for November.

Investors seeking to bolster their green credentials accepted a return of 1 basis point lower than a conventional bond which the German government sold at the same time.

France and the Netherlands have issued similar bonds too.

The sector received a boost in September when European Commission President Ursula von der Leyen said 30% of the EU’s 750 billion euro coronavirus recovery programme should be funded via green bonds.

The Bank of England welcomed Sunak’s announcement, and a decision by the government to require large businesses to make statements from 2025 about how they would be financially affected by climate change.

Sunak said Britain would be the first Group of 20 country to follow the recommendation of the Basel-based Financial Stability Board’s Task Force on Climate-related Financial Disclosures.

The BoE itself will conduct its first climate change stress test of financial institutions in June 2021, which Governor Andrew Bailey said would encourage banks and insurers to assess if they had enough capital set aside to deal with potentially existential threats to some investments.

The government also said it would establish clear rules on what counts as ‘green’ investment, based on an EU framework with possible UK-specific adjustments. ($1 = 0.7609 pounds) (Additional reporting by Andy Bruce Editing by Paul Simao)