This year’s Budget saw Chancellor Rishi Sunak announce the Government’s intention to start raising finance to fund projects designed to tackle climate change, and make the environment greener and more sustainable, by issuing Green Bonds. But are these Bonds worth the wait, or should environmentally conscious investors look to alternatives?
Following the initial announcement of the Green Savings Bonds, further details have emerged over the Summer. The Bonds will be issued by NS&I (National Savings) later this year (although no firm date appears to have been set for the launch) and will have a fixed three-year term. It appears there will be no option to access funds during the fixed term, following an initial cooling off period of 30 days. The Bonds will be open to investors aged 16 or over and will require a minimum investment of £100 and allow a maximum investment of £100,000. The Bonds will not be available through an Individual Savings Account, and interest will be paid gross. This means for individuals who have already used their Personal Savings Allowance to cover other savings interest, interest could be liable to Income Tax.
The key announcement that investors are waiting for is the interest rate that will be offered by the Green Savings Bonds. Despite the green credentials, we feel this factor alone will largely dictate the success or otherwise of this initiative.
Many savers and investors will recall the Guaranteed 65+ Bonds, which were the last major product launch by NS&I. Forming a major part of the 2014 Budget announcement, these Bonds were launched in January 2015 and were only open to investors over the age of 65. The Bonds were offered for terms of one and three years, and were a roaring success, selling out in a matter of weeks. The reason for their success was the attractive rates of interest offered, with the one year issue paying a gross rate of 2.8% and the three year issue paying 4% gross per annum. At the time, this placed the Bonds way ahead of the competition, providing over a third greater interest over the best paying accounts of similar terms.
The Treasury have a difficult decision as to where to pitch the interest rate offered on this three-year issue. At the moment, the highest paying three year Bonds are paying 1.75% per annum and this is significantly higher than the current interest paid by the Treasury on other forms of Government borrowing, such as Gilts. This is one key reason why we suspect that the rate offered by the Green Savings Bond will be less headline grabbing. Furthermore, there are other factors that need to be considered by all cash savers in the current climate.
Increasing inflation is becoming a growing concern for all savers. The Consumer Price Inflation figure for August caught our attention, recording an increase over prices seen in August 2020 at 3.2%. This was a large jump from the 2% announced in July, leading some economists to predict higher inflation still later in the year. There are particular reasons for the spike in the August reading, particularly when you consider that August 2020 saw the “eat out to help out” scheme provide subsidised dining to help the economy recover from the pandemic. Beyond food prices, however, increases in energy and petrol costs, plus supply shortages, may well add to inflationary concerns over coming months.
For savers, this simply heaps more misery for those who have suffered from record-low interest rates since March 2020. Indeed, the landscape for individuals who rely on savings income has been bleak for some time, and there are no signs of the pain easing any time soon.
It has traditionally been difficult for savings income to match the prevailing rate of inflation, leading to a small “real” loss in value for savers. However, the jump in the cost of living seen over recent months means that savers are now set on receiving a deeply negative “real” rate of interest, meaning their savings are rapidly losing their spending power.
We have been contacted by many prospective clients, who find themselves in a position where cash savings just aren’t providing adequate returns. For those investors willing to take on a modest level of investment risk, there are alternatives that can look to produce attractive levels of income, with some prospect of capital appreciation over time, which aims to offset some of the effects of inflation.
These strategies tend to hold a good proportion in Fixed Interest securities – Corporate and Government Bonds – which usually offer a fixed interest for the term of the Bond. Whilst these Bonds are not without risk, prospective returns are more appealing than cash savings, and those who wish to invest with a conscience can concentrate their investment in Socially Responsible Bond funds. These Bond funds use screening to only provide loans to companies that meet stated objectives, from avoiding investing in fossil fuels, intensive farming and oppressive regimes, to focusing on those companies that make a positive impact to the environment, community, or human rights.
So, should savers hold on for the NS&I Green Bonds, or look to alternatives? As we wait for the announcement of further details from NS&I, the situation for cash investors generally gets more difficult due to inflation. It is, of course, possible that the Treasury offer a very attractive rate on the NS&I Green Bonds, compared to the savings market generally. We think this is unlikely as it could question the prudence of such a move by the Treasury, given that the Green Bonds are essentially another form of Government borrowing.
Perhaps the bigger question is whether cash savers should consider alternative options to try and generate better returns in this period of low interest rates. For those who have a wish to support green issues, alternatives certainly exist to allow investors to try and achieve returns in line with inflation, whilst investing with a conscience.
If you are interested in arranging a review of your existing cash savings or would like to discuss investing with a conscience with one of our experienced financial planners, please get in touch here.
This content is for information purposes only. It does not constitute investment advice or financial advice.
