The UK government is set to issue the UK’s first sovereign green gilt this year, as well as the world’s first green savings bond to boost Britain’s transition to net zero by 2050.
Individuals will now be able to save between £100 and £100,000 into Green Savings Bonds from National Savings and Investments (NS&I).
Savers’ money will be locked in for three years with a fixed rate of interest, however the interest rates are yet to be decided.
Nigel Peaple, director policy and advocacy at The Pensions and Lifetime Savings Association, said: “We called on Government to make it easier for pension funds to invest in a climate aware way and, in particular, we asked them to introduce a Green Gilt.
“With new rules for climate disclosure coming into force for large pension schemes from 2021, pension fund trustees need a broader array of investments to meet their climate ambitions.
“Green gilts issued by the UK government will be particularly appealing for funded defined benefit pension schemes as they are lower risk when compared to investing directly in green energy projects.”
A report from HM Treasury said the new financial products would play a “central role” in its efforts to mainstream green finance products, attract dedicated funding for climate and environment objectives, deliver infrastructure improvements and create green jobs.
It aims to raise £15 billion this financial year.
Gemma Woodward, director of responsible investment at Quilter Cheviot, commented: “On the retail side, 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. For these reasons, the retail products should be supported, and we hope to see strong demand once they are available.”
However, Woodward questioned whether the investment would raise enough funds to make a tangible difference.
Woodward said: “The amount of cash needed to transition to a ‘green’ economy is going to run into the hundreds of billions, if not trillions. In this context, the £15bn the government is targeting this financial year seems to be a drop in the ocean, and hardly the numbers needed to ignite a ‘green industrial revolution’.”
She added that it was “likely the lion’s share of the £15bn will come from green gilts offered for institutional investors, rather than for retail savers through NS&I”.
Consumer demand for green savings has risen sharply over the past year, with figures showing that UK savers invested almost £1 billion a month into ESG funds last year, up 66% from the previous year. However, experts warned that the Government will need to give careful consideration to the interest rate in order to attract investors and reach their target.
Kate Smith, head of pensions at Aegon, said: “While savers and investors look to do their bit and make a positive change for society and the environment, the interest rate payable on the green bonds won’t be overlooked. Investors will be keen to make sure their money is earning a decent return.
“Diversification is an important factor too, and it’s key that they make the most of tax incentives by investing in pensions and ISAs. Navigating all the options can be tricky and seeking financial advice can help make them to make right decisions for their individual circumstances.”
Woodward said: “The government faces a delicate balancing act when deciding on the rate of return the bonds should offer, a detail which is conspicuously absent from NS&I’s site. Set the rate too low and demand will be limited. Set the rate too high and the products offer poor value for money for the taxpayer when compared with conventional gilts.
“The devil will be in the detail of where the money will eventually be invested, and who actually makes the investment decisions. And of course, any investment decisions will have to be taken as part of a holistic strategy towards net zero.”
Laith Khalaf, financial analyst at AJ Bell, echoed the sentiment: “The new NS&I bond the Chancellor is planning will give savers the option of a green home for their cash, but its success will likely be determined by the interest rate on offer.
“Savers showed they’re willing to vote with their feet when NS&I cut interest rates across a swathe of accounts last November, and 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, because 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.”
Khalaf said that while in theory, the green NS&I bond is a good way to offer consumers the option of an environmentally friendly savings account from a trusted provider, the Treasury faces challenges in the design of the bond to ensure it hits the mark with savers, and at the same time doesn’t cost the taxpayer too much money.
He added: “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.”
