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With climate change becoming an urgent priority, and interest rates at an historic low point, the 2021 Budget announced the introduction of Green Savings Bonds. These are intended to encourage savers to help fund environmentally-friendly projects.
They aren’t available to buy yet, but this guide includes everything we know so far.
What Are Green Savings Bonds?
A savings bond is a type of account that pays interest. This usually involves placing your money with an institution for a set period of time. At the end of the term, you receive your initial investment back, with the addition of interest.
Green Savings Bonds will be offered by National Savings & Investments (NS&I). This organisation is best known for selling Premium Bonds, which have a long track record and are owned by millions of people across the country. Other types of account are available, but the rates of interest are not particularly competitive.
The main appeal of a Green Savings Bond is the environmental aspect. The money collected through the scheme will be used to fund projects combatting climate change.
Currently, Green Savings Bonds are planned for launch later in 2021, however a date has not yet been announced.
When they are released, you will be able to apply on the NS&I website. Postal and telephone applications may also be accepted.
If NS&I’s other products are any indication, it is expected that Green Savings Bonds will have a minimum and maximum investment level. This has not yet been stated.
How Much of a Return Can You Expect?
The interest rate has not yet been confirmed.
A comparison with Premium Bonds is inevitable, as these are NS&I’s flagship savings product. Premium Bonds currently pay interest of 1%.
However, the interest on Premium Bonds is distributed in the form of a prize fund. This means that each month, some investors will earn no interest at all, while others will receive prizes of varying amounts.
Green Savings Bonds are likely to offer a fixed rate, which is guaranteed providing you hold your investment for the full term. The interest rate for new applicants may change over the lifetime of the product.
As the government want to encourage people to buy the bonds, a competitive interest rate is likely. Today, a typical savings account will offer interest of under 0.5%. Rates of around 1% per year are typical if you are prepared to tie your money up for a few years.
Green Savings Bonds will need to improve on these rates to encourage a reasonable level of take-up. Otherwise they will be considered a niche product for investors whose main priority is the environmental aspect.
Another important consideration is the minimum term, which again, is yet to be announced. Investors are unlikely to want to tie up large sums of money for several years without expecting a reasonable level of return.
What Are the Risks?
The nature of a savings bond means that the value will not fluctuate in line with the market. You would normally expect to receive your capital back at the end of the investment term.
Bank deposits are covered by the Financial Services Compensation Scheme. This means that up to £85,000 (or £170,000 for a joint account) is protected if the bank becomes insolvent.
NS&I deposits are different, as this organisation is effectively the government’s bank. Deposits are protected in full, so there is virtually no risk of losing your money.
However, this does not mean Green Savings Bonds will be a fully risk-free investment.
Interest rate risk is one potential downside. If the interest rate offered is 1% per year and the investment term is five years, there is a chance that interest rates could rise during that period. So by tying your money up for five years, you could miss out on improved interest rates during that time.
Additionally, you also need to consider inflation risk. Again, this is more of an issue for longer investment periods. Generally, the cost of living rises by 1-3% every year. So if you are only receiving a return of 1% on your savings, you are actually losing money in real terms as your capital has less purchasing power.
These risks are certainly not deal-breakers, particularly as the interest rate is yet to be confirmed, and could be higher than the examples mentioned. But as always, diversification is important and it is unlikely to be a good idea to place all of your money in Green Savings Bonds.
What Will the Money be Used For?
The purpose of the Green Savings Bond project is to raise money for environmental projects. The goal is to reach ‘net-zero’ in terms of carbon emissions by 2050. This means that any carbon emissions will need to be offset by technology that actively removes harmful greenhouse gases from the environment.
The government will use savers’ money to make loans to organisations undertaking eligible projects, such as:
- Offshore wind farms
- Making homes more eco-friendly
- Upgrading public transport
- Manufacturing electric vehicles
- Creating green jobs
It is currently unclear how much money the government expects to raise from the initiative. But crucially, the interest payable and the return of capital is not dependent on the success of these projects.
What Are Some Other Options?
If ethical, sustainable, or environmentally friendly investing is of interest, there are a number of options available to you now.
For example, there are already savings accounts in the market which aim to finance environmentally friendly projects. However, these accounts are generally available from smaller banks and are not widely used. Green Savings Bonds will need to offer more competitive terms if they are to become a mainstream product.
You can also invest in companies which operate in an ethical or sustainable manner. For example, they might:
- Develop technology to tackle climate change or deal more efficiently with waste.
- Use resources responsibly.
- Have high ethical standards in dealing with customers and employees.
- Avoid animal testing and use alternatives.
- Be open, transparent, and demonstrate integrity at all levels of the business.
Few companies have a perfect record in all of these areas, and it can be difficult to select the best ones to invest in. While ethical considerations are important to many investors, most also want to make a return on their investment. It’s important to measure companies both in terms of sustainability and profitability.
An easier way of investing in these companies is to choose a fund or investment portfolio that is screened using Environmental, Social, and Governance (ESG) criteria. Some of the benefits of this are:
- The research and selection process is taken care of by a fund manager.
- The companies are regularly monitored for suitability.
- The portfolio will hold a wide range of companies across different business sectors. This avoids carrying too much risk in one area.
However, investing in shares, even through a diversified fund, is more risky than investing in savings bonds. The value will fluctuate daily in line with the market, and you are not guaranteed to receive your original investment back.
This is why it’s important to hold a wide range of assets, which can include cash, bonds, shares and property. These asset classes tend to behave in differently, which means that the growth of one can offset the volatility of another.
Green Savings Bonds could form part of a diversified investment strategy.
Could Green Savings Bonds be For You?
Green Savings Bonds might suit you if:
- You would like to use your savings to help tackle climate change.
- You want to be sure that your money is secure.
- You prefer to receive a fixed rate of interest.
- You are prepared to lock your money away for a fixed period.
But you should probably look at other options if:
- You want to invest for the longer-term (5 years or more).
- You are seeking returns ahead of inflation.
- You expect to dip into your savings in the near future.
- You are happy for your investments to fluctuate if this means your investment has higher growth potential.
There are still a number of uncertainties about the practicalities of Green Savings Bonds, but providing the interest rate is reasonable, they could complement your existing investment strategy.
Please don’t hesitate to contact a member of the team to find out more about your investment planning options. Book a free call with a member of our team today, without obligation. We look forward to speaking with you.