The success of the new green bond will likely depend on the interest rate on offer
Rishi Sunak is expected to confirm plans for £15bn worth of green savings bonds in the coming days, which will allow Brits to invest in renewable energy schemes.
The bonds, expected to be among the biggest in the world, will be accessible via NS&I, a savings organisation backed by the treasury.
The announcement by the chancellor comes as the UK government steps up its efforts to go green ahead of the upcoming Cop26 climate conference in Scotland.
Sunak has previously said that Britain will market its first green bond in 2021 to meet growing investor demand for such assets designed to fund an environmentally friendly allocation of resources.
The success of the new green bond will likely depend on 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,” said Laith Khalaf, financial analyst at AJ Bell.
Thanks to the Bank of England’s quantitative easing programme and ultra-low interest rates, the government is able to borrow money cheaply, currently around 0.4% per year for 5 years.
“Any premium offered by the green savings bond above prevailing gilt yields is effectively an extra burden for the taxpayer, and costs incurred in this way will naturally be weighed up against other fiscal decisions taken by the Chancellor to repair the nation’s finances in the wake of the pandemic,” Khalaf added.
The longer-term nature of funding green projects means that the Treasury will need to decided how long they keep savers’ money stored away.
“Presumably the government won’t want money flowing in and out regularly, so an instant access account doesn’t look feasible, and a product that locks up savings for say five years looks more appropriate. The longer the government asks savers to keep their money in the bond, the less take-up they are likely to get without offering a seriously big slice of interest.”
There has been a substantial rise in demand for ESG investment funds recently, with inflows into the industry reaching £10bn in 202, up from £3bn the year before.
“The new NS&I bond will be a litmus test to see if there is appetite in the savings market for sustainable products on a big scale. In theory a green NS&I bond is a great idea which will give consumers the option of an environmentally friendly savings account from a trusted provider. But 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,” said Khalaf.
