Green bonds fund projects that have positive environmental and/or climate benefits.
Many companies and banks issue them, as do countries such as Italy, Germany and France.
Our government has now decided to follow suit later this year, an announcement made alongside the recent Budget. It will be the first time is has issued bonds with an explicit environmental focus.
Part of the thinking is down to boosting environmental, social, and corporate governance that has so grabbed the attention of the public, forcing the City to take the green agenda seriously. But, it is suggested, another factor is the need to help pay back the pandemic billions by enticing everyday savers to commit some of the £143.5 billion stashed away between March 2020 and January 2021, according to figures from the Bank of England, raising £15 billion for government coffers.
Unlike regular government bonds, the green version will be available via National Savings and Investments, and so open to you and me.
Taking the NS&I route is not without controversy.
2020 saw the organisation come under heavy criticism for its decision to reverse cuts to its best buy rates only to heavily reduce them later in the year.
And, while many will surely wish to embrace the initiative and feel better about helping to save the planet, others will view it as just another ‘woke’ fad, with the Government pandering to the snowflake generation.
After all, just like electric cars are only as environmentally friendly as the manner in which the electricity is generated, consuming precious metals in battery production, all a huge waste of money if hydrogen-powered vehicles take off, how green is green?
Bryn Jones, fixed income director at Rathbones Unit Trust Management, told FT Adviser: “It is always important with something like a green bond to know what the capital will ultimately be used for; we know for example, of a green bond that was launched by a company that operates oil tankers. They use the capital to make the tankers that carries the oil around more energy efficient. From an ESG point of view that is a waste of time.”
His long-standing policy is to exclude all regular bonds issued by governments on the basis that governments maintain armies, and, in many cases own nuclear weapons, and so the bonds used to fund government expenditure are rarely ethical.
Yet what will likely make or break the new green bonds is not their environmental qualities, but hard cash.
What level of interest rate will be on offer? The Government are yet to say.
Too low will limit take-up; too high and, like George Osborne’s NS&I ‘Pensioner Bonds’, they will be branded over-generous, a political bribe at the expense of taxpayers.
Speaking to website This Is Money, James Blower, a savings analyst and founder of The Savings Guru, said NS&I would likely have to pay 1.5-2 per cent interest to attract any kind of volume for green bonds from everyday savers. However, he did not expect them to meet best buy rates. “I wonder whether green bonds are being used, rather than recovery bonds, to pull at our emotions and hope that people will be more likely to back them with a lower rate of return.”
Back at FT Adviser, Sam Buckingham, vice president of investment strategy at investment management firm Kingswood, added: “With yields already so low, particularly in the government bond space, retail investors should be aware it is possible their investment will lose value in real terms, that is, when accounting for inflation.”
In which case the cynics might start calling them (in the) red bonds!