Savings that protect the planet: Guide to the Green Savings Bond system
Government-backed green savings that help your bank balance seem like a no-brainer.
But the new Green Savings Bond Scheme (GSB) announced by the Chancellor Rishi Sunak this week just too good to be true?
As is often the case with any investment, the devil is in the details.
Here, we take a 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 did the government launch one?
The government is committed to reducing its carbon emissions to zero by 2050 and must finance the costs of this transition, which will involve building new infrastructure and employing large numbers of people.
He also has a separate issue – he wants to encourage the financial resilience of people who amassed savings during the lockdown but struggle to find places to hide them where they won’t lose value in real terms due to the low rates. of interest.
GSBs, along with a program for larger investors, aim to finance the transition, while providing individuals with a safe place to save money in the long run.
The money set aside in the bonds will be used to finance environmental projects such as wind power and hydrogen.
“Green bonds serve the dual purpose of enabling people to join the green agenda while providing an outlet for ‘accidental’ savings accumulated during lockdowns,” said Gemma Woodward, director of responsible investing at the manager. fortune Quilter Cheviot. “For these reasons, retail products need to be supported, and we hope to see strong demand once they become available.”
Who operates 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 are more familiar with NS&I when it comes to pulling premium bonds. It also offers savings accounts and bonds for adults and children.
We don’t know everything about bonds so far, but we do know that investors will need to hold them for three years to earn returns – so they’re not good if you want instant access to your money – and that the interest rates 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 transferred to the UK Treasury.
In return, the Treasury will allocate an amount equivalent to the proceeds raised from the GSBs, to its chosen green projects, within two years.
The government has pledged to release details of how funding is making a difference, so green bond holders can check the effect of their money.
Becky O’Connor, head of pensions and savings at the investment platform Interactive Investor, points out that NS&I is already the most popular savings institution in the UK, which means it could be very popular.
“NS&I Green Bonds will potentially be the holy grail for savers who want to do their part but don’t want to put their money at risk,” she said. What rate will I receive on the bonds?
That’s the million dollar (or not) question. The government has not yet told us what interest rate will be payable on green bonds. Laith Khalaf, financial analyst at the AJ Bell investment platform, says the success of bonds will depend on where the rate is launched.
NS&I rates on other products are currently not very competitive, and the organization lost entire swathes of customers when it slashed rates on its direct savings account from 1% to 0.15% in 2020 .
“Savers have shown they are ready to vote with their feet,” says Laith. “If the Green Savings Bond offers a paltry interest rate, it might not generate public demand.”
Inflation is currently 2.1%, and with the Bank of England base rate at an all time high, it is likely that Green Bonds will not match that rate, meaning they could lose. money in real terms over the three years if inflation persists. high.
“It’s hard to put your money where you are when they’re still low key about the rate,” says Sarah Coles, personal finance expert at Hargreaves Lansdown investment group.
“The rate must be competitive to achieve significant savings. “
Can I Lose Money on Green Savings Bonds?
If the rate is important on green savings bonds, savers will also be attracted to the fact that their money is completely safe. The only way to lose money in these bonds would be for inflation to lower the value of your balance.
NS&I is backed by the government, and the first £ 85,000 in savings per person with the bank is also backed by the Financial Services Compensation Scheme (FSCS), which means that even if the NS&I does not refund your money, you would receive it from FSCS.
Are there good alternatives to these bonds?
If you’re interested in ethical saving and investing, there are plenty of other ways to feel like you’re doing well with your finances.
On the savings side, the ethical bank Triodos (triodos.fr) offers a 0.4% fixed rate savings bond for three years and is committed to loaning the money to organizations that have a positive impact on social, cultural or environmental issues. The money of this bond is also protected by the FSCS.
If you are willing to take risks with your money and have a long-term horizon, you can opt for an ethical investment fund or lend the money directly to an environmental organization in exchange for a potentially return. anti-inflationary. The problem is, the organization you lend to may not be able to repay its debts, or the fund you invest in may lose value.
For example, ethical crowdfunding group Abundance is currently offering a 1.6% ten-year bond to help Northern Gas Networks transition to a low-carbon future.
The business is regulated by the government, which gives you some visibility into its future profits. You can hold bonds like this in a type of Isa called Innovative Finance Isa (IFISA) or a pension, to make sure they are tax-efficient.
Triodos also offers a similar range of bonds. These are risky because your money is given to only one company, and if it goes bankrupt you have no protection.
You can also consider an environmental, social and governance (ESG) investment fund, which splits your money among a number of companies that claim to help the environment. There is no official definition of what constitutes “ethical”, “environmental” or “sustainable”, so it is up to you to verify that you are satisfied with the investments in the fund.
Figures show UK savers invested on average nearly £ 1bn per month in ESG funds last year, up 66% from the previous year. These funds can also increase or decrease.
Figures from Trustnet show that ESG funds grew by almost 15% on average last year, although this is no guarantee of future performance.
Among the most notable players were the Baillie Gifford Positive Change fund, up 80 percent, and Pictet’s Clean Energy Fund, up nearly 50 percent. These are returns NS&I savers can only dream of, but these funds are only suitable for those with a high tolerance for risk.
Where can I find more information about the NS&I product?
There is already a web page for new green savings bonds at nsandi.com/green-saving, while you can find out more about all green finance, including products for institutional savers such as company pension funds, at gov.uk
If you want more money saving tips and tricks, as well as money discussing and alerts on deals and discounts, join our Facebook group, Money Pot.
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