The government’s green bond promises savers they will be able to “make the world greener, cleaner and more sustainable”. But what they won’t make is a return on their investment that beats other options on the market.
When it was launched last month, the bond, from National Savings & Investments (NS&I), was described as a world first – people can invest money that is 100% secure and will be used for government spending on sustainable projects, such as cleaner transport and renewable energy.
However, the return on your investment is just 0.65%, fixed for three years – a figure dubbed as “paltry” by the opposition and analysts.
“This suggests to savers that green investments are less rewarding financially, when many studies have shown that this is not the case,” says Molly Scott Cato, the Green party’s economic spokesperson and former MEP. “People shouldn’t be offered a lower return for doing the right thing.”
The green savings bond was announced by chancellor Rishi Sunak in the spring budget and went on sale at the end of October. Savers can invest from £100 and up to £100,000. The money cannot be withdrawn for three years.
It is guaranteed by the Treasury, which means all of the investment is protected. Under the Financial Services Compensation Scheme (FSCS), customers of financial services firms are protected for up to £85,000 is the firm goes bust.
The fixed 0.65% rate means that someone who invests £10,000 will earn £65 a year in interest.
The amount paid in will contribute towards government spending on green projects in six areas – cleaner transport, such as zero-emission buses; renewable energy, such as wind power and hydrogen research; preventing pollution; making buildings more energy efficient; protecting areas of natural beauty, and countering environmental threats by the installation of projects like flood defences.
Figures on how much has been raised will be released at the end of the financial year, according to the Treasury. It says the money invested will be allocated to green projects within two years, and details will be published with the environmental benefits.
The rate on the bond is well below that offered on comparable accounts from competitors. In some cases, savers can earn almost three times more. Both UBL UK and United Trust Bank offered 1.82% for a three-year bond – so the same £10,000 would earn £182 a year. JN Bank, meanwhile, offers 1.81%, according to financial information site Moneyfacts.
On green bonds, the Gatehouse Bank has a three-year fix Woodland Saver account which pays 1.78%. For every account opened, a tree is planted in a UK woodland. Another option is the Oxbury Forest Saver, a one-year fixed-term bond, which offers 0.7%, The interest earned is not given back to the saver, but instead used to plant trees to mitigate carbon emissions.
Green savers also have the option of putting the money into the stock market, but this carries more risk.
Jason Hollands, of financial advisers Bestinvest, says: “If you are prepared to take a longer-term view, then FP WHEB Sustainability Fund is an equity fund that invests globally in the shares of companies that fit into nine themes: cleaner energy, environmental services, resource efficiency, sustainable transport, water management, education, health, safety, and well-being. Over the last three years it has returned 40%, but equities are volatile and the past is no guide to the future.”
Anna Bowes of Savings Champion says the NS&I bond is not for those who are solely looking for a return on their investment, especially at a time when interest rates are expected to rise and inflation is high.
“For the environment’s sake it would be great to think that this bond will still prove popular, but it’s a real blow for savers to be offered such a paltry rate,” she says.
Sarah Coles of Hargreaves Lansdown says that as interest rates are expected to rise in the near future, “we can expect fixed rates to keep climbing and 0.65% to look even less attractive by comparison”.
The Treasury says that one of the benefits of the bond is that savers are guaranteed to get their money back. However, since deposits of up to £85,000 in other banks are covered by the FSCS, the government protection is, in effect, only relevant to people investing between £85,000 and £100,000.
But the low rate will not turn off all investors, especially those who are committed to using their money for sustainable objectives.
“For those who just want to know their money is a part of the solution, who want to park it somewhere safe and are really not bothered about real rates of return, then it might still be attractive,” says Rebecca O’Connor of Interactive Investor.
“It’s unfortunate though, that this group may be a much smaller group than those who were initially keen on the idea.”
Responding to the criticism, a the Treasury said: “NS&I has to offer a fair interest rate to savers whilst offering value for money for taxpayers and maintaining a competitive position within the broader financial services sector. The interest rate reflects this.”
This article was amended on 14 November 2021. Molly Scott Cato is a “former” MEP; she served in the European Parliament until 2020 when the UK left the EU.