Government-backed green savings that help your bank balance sound like an absolute no-brainer.
But is the new Green Savings Bond scheme (GSB) announced by chancellor Rishi Sunak this week simply too good to be true?
As is so often true of any investment, the devil will be in the detail.
Here, we look at what the new bonds will offer, how they will work and what the alternatives are.
What is a Green Savings Bond and why has the government launched one?
The government has a commitment to ‘net-zero’ carbon emissions by 2050, and needs to fund the costs of this transition, which will involve building new infrastructure and employing large numbers of people.
It also has a separate problem — it wants to encourage financial resilience among individuals who have amassed savings during lockdown but are struggling to find places to stash them where they won’t lose value in real terms because of low interest rates.
GSBs, together with a scheme for bigger investors, aim to pay for the transition, while providing a safe place for individuals to save money for the longer term.
The money that is put away in the bonds will go towards financing environmental projects such as wind and hydrogen power.
‘Green bonds serve the dual purpose of allowing people to buy into the green agenda while also providing an outlet for the “accidental” savings built up during the lockdowns,’ explains Gemma Woodward, director of responsible investment at wealth manager Quilter Cheviot. ‘For these reasons, the retail products should be supported, and we hope to see strong demand once they are available.’
Who is operating the bonds and how will they work?
The bonds will be operated by National Savings & Investments (NS&I), which is the savings arm of the government. Most people know NS&I best for operating the Premium Bonds draw. It also offers savings accounts and bonds for adults and children.
We don’t know everything about the bonds so far, but we do know investors will need to hold them for three years to get returns on them — so they are no good if you want instant access to your money — and that the interest rate will be fixed and guaranteed for the duration of your investment.
You will be able to invest between £100 and £100,000 in the bonds per person, and the money will be passed to HM Treasury.
In return, the Treasury will allocate an amount equivalent to the proceeds raised from GSBs, to its chosen green projects, within two years.
The government has committed to publishing details of how the funding is making a difference, so green bondholders can check the effect that their money is having.
Becky O’Connor, head of pensions and savings at investment platform Interactive Investor, points out that NS&I is already the most popular savings institution in the UK, which means they could be very popular.
‘Green NS&I bonds will potentially be the holy grail for savers who want to do their bit but do not want to put their money at risk,’ she says.What rate will I receive on the bonds?
This is the million-dollar (or not) question. The government has not yet told us what interest rate will be payable on green bonds. Laith Khalaf, who is a financial analyst at investment platform AJ Bell, says that the success of the bonds will depend on where the rate is pitched.
NS&I rates on other products are currently not very competitive, and the organisation lost swathes of customers when it cut rates on its direct saver account from one per cent to 0.15 per cent in 2020.
‘Savers showed they’re willing to vote with their feet,’ Laith says. ‘If the green savings bond offers a paltry rate of interest, it might fail to ignite demand from the public.’
Inflation is currently running at 2.1 per cent, and with the Bank of England base rate at a record low it is likely that the green bonds will not match that rate, meaning they could lose savers money in real terms over the three years if inflation remains high.
‘It is hard to put your money where your mouth is when they are still tight-lipped on the rate,’ says Sarah Coles, who is a personal finance expert at investment group Hargreaves Lansdown.
‘The rate needs to be competitive to draw significant savings.’
Can I lose money on green savings bonds?
While the rate is important on green savings bonds, savers will also be attracted by the fact that their money is completely safe. The only way that you can lose money in these bonds would be because inflation makes your balance worth less.
NS&I is backed by the government, and the first £85,000 of savings per individual with the bank is also backed by the Financial Services Compensation Scheme (FSCS), meaning that even if the NS&I did not pay your money back you would receive it from the FSCS.
Are there good alternatives to these bonds?
If ethical saving and investing is attractive to you, there are many other ways to feel that you are doing good with your finances.
On the savings side, ethical bank Triodos (triodos.co.uk) offers a fixed rate savings bond at 0.4 per cent for three years, and pledges to loan the money to organisations making a positive impact on social, cultural or environmental issues. Money in this bond is also protected by the FSCS.
If you are willing to take risks with your money and have a long-term timeframe, you could opt for an ethical investment fund, or lend the cash directly to an environmental organisation in return for an potentially inflation-busting return. The issue is that the organisation you are lending to may not be able to pay back its debts, or that the fund you invest in may go down in value.
For example, ethical crowdfunding group Abundance currently offers a 1.6 per cent ten-year bond to help Northern Gas Networks transition to a lower-carbon future.
The company is regulated by the government, which gives you some visibility on its future earnings. You can hold bonds like this in a type of Isa called an Innovative Finance Isa (IFISA) or a pension, to ensure they are tax efficient.
Triodos also has a similar range of bonds. These are risky as your money is given to one company, and if they go bankrupt you have no protection.
Alternatively you could consider an environmental, social and governance (ESG) focused investment fund, which spreads your money across a number of companies that purport to help the environment. There is no official definition of what constitutes ‘ethical’, ‘environmental’ or ‘sustainable’ so it is up to you to check you are happy with the investments in the fund.
Figures show that UK savers put almost £1billion a month on average into ESG funds last year, up 66 per cent from the previous year. These funds can also go up as well as down.
Figures from Trustnet show that ESG funds rose by nearly 15 per cent on average last year, though this is no guide to future performance.
Some standout performers included Baillie Gifford Positive Change fund, up 80 per cent, and Pictet’s Clean Energy Fund, up nearly 50 per cent. These are returns that NS&I savers can only dream of, but these funds are only suitable for those with a high-risk tolerance.
Where can I find more information on the NS&I product?
There is already a webpage for the new Green Savings Bonds at nsandi.com/green-saving, while you can find out more about the whole green financing package, including products for institutional savers such as company pension funds, at gov.uk
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