Reports that Rishi Sunak, UK Chancellor, will today announce £15 billion of Green Savings Bonds, to be made available through NS&I. But how attractive will interest rates be, and can Sunak entice enough of us to make them worthwhile.
NS&I Green Bonds: a leap forward for ‘do good’ savings
Rishi Sunak will announce various tranches of ‘green bonds’ will go on sale this year and next, through state saver NS&I (see website here). These will enable savers to invest in renewable energy projects including solar power and wind projects, building green infrastructure, and the creation of green jobs.
Becky O’Connor, head of pensions and savings at Interactive Investor, thinks this could be a game changer for savings in green products. “The green pension and investment movement is growing and while there are already some green savings accounts on the market, the introduction of a green product by NS&I, the UK’s most popular savings institution, will make green options truly mainstream.”
In recent years, investments in green funds have ballooned as public interest grows in taking care of the planet and its residents. Last year alone saw £10 billion flow into the sector. This makes Sunak’s offer an attractive option for those wanting to save and take less risk than they would in the stock market, but still ‘do good’.
Deciding appropriate interest rates will be delicate
O’Connor adds her reservation: “Whether green will mean go for savers will all come down to the rates on offer. They need to be high enough to tempt people to green options, but not so high that NS&I is deluged.”
“As with other savings accounts that currently pay far less than inflation, it’s unlikely that the green bonds will give savers a real rate of return that beats price rises. The hope is that they will at least compete with current best buys.”
Laith Khalaf, financial analyst at AJ Bell, agrees that the success of the bonds is based on setting the right rates. “Savers showed they’re willing to vote with their feet when NS&I cut interest rates across a swathe of accounts last November. If the green savings bond offers a paltry rate of interest, it might fail to ignite demand from the public. On the flip side, if the interest rate is too high, it will raise questions about the cost to the taxpayer. Remember, the green savings bond is ultimately just government borrowing by another name. Savers won’t be investing directly in renewable energy projects, rather they’ll be lending money to the government to do so, in return for interest on their money.
Money is cheap at the moment
Khalaf continues: “Of course, thanks to the Bank of England’s QE programme and ultra-low interest rates, the government can borrow money extremely cheaply. Currently it’s around 0.4% per annum for 5 years. Any premium offered by the green savings bond above prevailing gilt yields is effectively an extra burden for the taxpayer.”
“Sunak is between a rock and a hard place here. If he hikes rates up for the green bond, he’ll face criticism for needlessly spending money when government borrowing is already sky high. If the Chancellor opts for fiscal prudence, it may be that the ability to save in a way that helps green causes, together with the security and brand of NS&I, is able to overcome any quibbles over the interest rates on offer. But with rising inflation a clear and present danger to cash returns, consumers may well be picky about the interest rate they get on their money, particularly if it’s locked away for the longer term.”
The Steps’ View
This is a bold step on the path towards building a greener future and achieving net-zero 2050 targets. There are two things to watch out for when Sunak announces this to the City. First, will the bonds come with a good rate of interest, especially against rising inflation? With Bank of England rates so low, there are no savings accounts that offer you rate of return that beats inflation, according to data provider MoneyFacts. It means the bonds are unlikely to offer rates that beat inflation either. It might be prudent to ask yourself how much of your finances should be directed at savings versus investments.
Second, how restrictive will lock-up periods be? We recommend saving 3 – 6 months worth of costs for emergencies, which could mean penalties if you suddenly need the cash. For other, short-term goals, green bonds may be a good option. However, if you have longer – say at least 5 years – and you’re targeting green outcomes, there may be a better way. Green ‘ESG’ funds offer the potential for both doing good and doing well in terms of returns, and have a much greater ability to stay ahead of pesky inflation.