Are Green Bonds A Good Deal?

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Way back in March, Rishi Sunak announced that the UK would be the first country to offer a government-backed “green bond”.  These green bonds are finally on sale and will be available for at least three months.  Here’s a quick guide to what you need to know about them.

The basics of the green bonds

The bonds are 100% guaranteed by the Treasury via its National Savings and Investment (NS&I) arm.  This is what makes them a world first.  There are (plenty of) other green bonds out there but the UK’s new green bonds are the first to be backed by a sovereign government.

You have to be at least 16 to purchase them and they’re available in denominations of between £100 to £100,000.  The purchase limit is £100,000 per person.  From an investment perspective, the key point is that the bonds offer a return of 0.65% per annum over a three-year term.

From an environmental and social perspective, the government has committed to keeping purchasers updated on how their money is being used and hence the impact they’re making.

Looked at as an investment

Quite bluntly, as an investment, the green bonds look underwhelming by any standards.  At 0.65% interest, a £100 investment would deliver a profit of £1.96 over three years.  Even if inflation were running exactly at the government’s target of 2%, your returns would fall short of it.  Right now, inflation is running at about 3% and is forecast to increase to 4% next year.

Of course, inflation may drop naturally.  If, however, it drops below 2% then the Bank of England should act to push it back up again.  If it doesn’t drop naturally, then the Bank of England may choose to raise interest rates to bring it down.  If they do, then the 0.65% offered by the new green bond will almost certainly become even less attractive.

Realistically, it’s hard to see the Bank of England hiking interest rates to any significant extent.  The interest in the cost of finance could hit a lot of people very hard.  It is, however, very possible to envisage them raising interest rates slightly to take the edge off inflation while still allowing it to run above its 2% official target.

Even if the Bank of England just returns interest rates to their pre-pandemic level of 0.5% that will put the new green bond only slightly above the interest rates which will probably be available on standard savings accounts.

Looked at from a sustainability perspective

The green bonds are intended to finance initiatives that will help the UK to make progress towards its commitment to be net-zero by 2050.  They are intended to fund projects such as the development of clean energy sources and clean transport infrastructure.  Projects relating to the mitigation of climate change are also eligible for funding from the green bonds program.  These could include the building of flood defences.

Although the green bonds were launched as part of the build-up to COP26 and in connection with the UK’s net-zero target, their use is not restricted to projects relating to climate change.  They can also be used to support projects with broader environmental benefits.  These can include planting trees, protecting biodiversity and environmentally sustainable agriculture.

If that matters to you, you could view the government’s green bonds scheme as being the equivalent of a charitable donation, albeit in a very unusual form.  With that said, however, if you make a direct donation to a registered charity, you can have a much higher level of control over where and how your donation is spent.  You can also potentially claim the donation as a tax-deductible expense.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

For specialist tax advice, please refer to an accountant or tax specialist

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