NS&I green bond disappoints: here are some much better alternatives

Is keeping your money invested in green funds for an extra two years better than this new three-year rate fixed-term bond? Katie Binns shares her great ideas with us.

After waiting months for the rate of NS&I green bonds to be confirmed, savers could be forgiven for feeling dispirited last week when they learned the new three-year fixed-term bonds will pay just 0.65% interest.

Right now, even though savings rates are paltry, you can earn 1.57% AER (annual equivalent rate) interest in a two-year fixed savings account via Zenith Bank - that’s more than double the rate offered on the NS&I green bond. A three-year fixed savings account via JN Bank offers 1.81% AER interest - that’s 1.16% higher than NS&I’s offering. Even Premium Bonds offer a more attractive 1% ‘prize rate’.

Savers will seemingly only benefit from the feel-good factor if they opt to put anything from £100 to £100,000 in this new Treasury-backed product. The government says it will use what is raised through the green bonds to fund projects such as zero-emission public transport. 

Becky O’Connor, head of pensions and savings at interactive investor, explains: “The government says it will update people on how the proceeds are spent. This transparency will now be critical to savers who know they will be accepting a lower interest rate, for the peace of mind that they are funding the UK’s green dreams.”

The feel-good factor may not be enough for some amid the rising cost of living, compounded by bumper energy bills and tax rises. If you decide to go for NS&I green bonds you will effectively be losing money in real terms to do so.

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However, NS&I’s offering isn’t the only green bond around. The government raised £10 billion from selling 'green gilts' in September, a record amount for a sovereign green bond that brings the UK closer to its funding goals for becoming a net-zero country by 2050. This bond sale was impressively oversubscribed with orders of £90 billion. This indicates clear enthusiasm for investment opportunities that support renewable technologies, creating green jobs and protecting biodiversity.

Yes, it is institutional investors that dominate this market right now, but there are ways for the everyday investor to add green bonds to their portfolio.

Green investment bonds are structured in the same way as traditional bonds, but the money invested in them is only used for projects working to tackle climate change.

Myron Jobson, personal finance campaigner at interactive investor, says: “Savings products and bond funds are inherently different – the value of the latter is affected by market conditions, meaning the value of an investment would fluctuate, whereas the value of cash put in a savings bond is maintained for the duration of the fixed-term period – save for the erosive effect of inflation.”

Jobson thinks ethical bond funds can pip the NS&I green bond to the post. “The NS&I bond offers precious little incentive for savers to support the nation’s green causes. And you don’t have to sacrifice returns to make a positive impact on the environment through your investments. For those willing to lock up their money over five-plus years, ethical bond funds could be a good alternative, carrying greater risk yet offering a more attractive coupon and the potential for growth on your initial investment.”

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If you want to diversify your portfolio with some green bonds, what options are there? As always, interactive investor’s ACE 40 list is a good place to look. Here, there are six ethical bond funds to consider. 

Lyxor Green Bond (LSE:CLIM) and PIMCO GIS Global Bond ESG invest in a range of investment grade bonds from around the world - the former returns 0.55% while the latter returns 1.48%.

Meanwhile, ethical bonds that are sterling denominated or hedged back to sterling include Liontrust Sustainable Future Corporate Bond Fund (currently yields 2.78%), Royal London Ethical Bond (yields 2.69%), Rathbone Ethical Bond (yields 3.10%) and Threadneedle UK Social Bond (yields 1.3%).

Rathbone Ethical Bond stands out in the collection for its performance. It invests mainly in UK fixed-income securities, but also holds around 30% of its portfolio in overseas securities. Bonds issued by firms involved in mining, arms, gambling, pornography, nuclear power, alcohol and tobacco are excluded.

The fund’s managers Bryn Jones and Noelle Cazalis focus on ESG issues such as social housing and renewable energy. In an interview with interactive investor in November 2020, Cazalis said she and Jones avoid backing companies feeding into issues such as biodiversity destruction, and expect to see more investment opportunities in areas such as renewable projects and green bonds in the future. 

Bonds may not offer outstanding returns, but they still provide a defined return and useful element of balance and diversity to a portfolio.

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