Green bonds explained
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Following growing demand for eco-friendly investment options and with increasingly frequent natural disasters bringing climate change issues to the fore, many people are keen to invest their money into something that drives positive change. That’s where green bonds, also called 'sustainable bonds', come in.
On this page, you’ll learn more about what green bonds are, how they work and the pros and cons of these types of accounts. We also explore the alternative options that may be available, including savings accounts from ethical banks.
Definition: A green bond is a type of savings product that raises capital to fund environmental and climate-related projects
Fixed term: Green savings bonds pay a set interest rate for a fixed term, e.g. three years
Interest: Green bonds offer a guaranteed return, although it’s worth noting that other types of bonds may pay a more competitive interest rate
What are green bonds?
A green bond is a type of investment that provides a fixed income and aims to raise capital for climate, sustainability and environmental projects. Green bonds, or green investment funds, are usually backed by the issuer’s balance sheet or asset-linked, and therefore offer the same credit rating as any other debt obligations.<wbr> In simple terms, a green bond is a way investors can use their money to support environment-specific projects.
Are green bonds and climate bonds the same thing?
Yes, green bonds and climate bonds are the same, since they both make contributions to climate-focussed initiatives. They’re also known as green savings bonds, green energy bonds and green investment bonds.
Why were green bonds introduced?
Green bonds have been introduced in many countries in a bid to tackle the climate change crisis, fuelling investment into important projects that will help meet climate deadlines and targets. The World Bank, for example, issued their first official green bond in 2008, and has since issued approximately USD$18 billion worth in green bonds in 28 different currencies (as of February 2024).
What is a UK green gilt?
In 2021, the government unveiled the UK’s first Green Gilt – a 12-year bond, maturing on 31st July 2033. This was quickly followed by the launch of a retail green savings bond, which is issued by National Savings & Investment (NS&I) on behalf of the Treasury. It’s hoped the money raised by both initiatives will help accelerate the UK’s green agenda to be net zero by 2050.
What is the interest rate on green bonds in the UK?
For the NS&I 3 year fixed green bond, launched in 2021, the rate is currently 2.95% AER (as of February 2024). This is the seventh issue of the bond - in August 2023, it peaked at 5.70% AER.
What do green bonds pay for?
Essentially, green bonds give savers the opportunity to invest in projects aimed at making the world greener and more sustainable. Some examples in the UK include zero-emissions buses, renewable heating systems for schools and hospitals, forest planting and flood defence systems, among many others.
For example, for the Green Gilt and Green Retail Savings Bonds offered by the UK government, there are six types of acceptable expenditure:
- Clean transportation
- Renewable energy
- Energy efficiency
- Pollution prevention and control
- Living and natural resources
- Climate change adaptation
How do green savings bonds work?
As well as helping you save money, green savings bonds also contribute towards green spending projects. You’ll be saving while helping to make the world greener, cleaner and more sustainable.
Green bonds work in the same way as any other bond. When you purchase a bond, you are basically lending your money to someone, such as the government, who will then use this money to finance climate-specific projects that bolster efforts to hit the net-zero carbon emissions 2050 target.
As the lender, you’ll be able to invest any amount, typically between £100 – £100,000, over a fixed term at a set interest rate. As with any other type of bonds, your interest could be paid annually or as a sum at the end of your set term.
Can I make money with green bonds?
Yes, you’ll be able to grow your money as well as contribute to positive climate action by investing in green bonds. However, it’s worth researching the market before you commit to opening a green bond, as you may find the interest rate is lower than that available on some other types of accounts like fixed rate bonds.
The interest rate on government green savings bonds has already been raised twice following increases in the Bank of England base rate. While this has helped to make them more competitive, you may have to be prepared to sacrifice some financial gain if you want to invest in green bonds.
Alternatively, you could look at other savings products offered by ‘green’ or ethical banks (more on this later).
Are green bonds a good investment?
Green savings bonds could be a good investment choice if you have a lump sum saved and want to contribute to something positive. However, when making your decision, you’ll need to consider the terms and conditions carefully, as green bonds often restrict your access to your cash for the agreed period of the term (the same as most fixed term deposits). If maximising your return is important to you, you may want to check that the interest rate is competitive. You can do this by comparing green bonds to other savings accounts, such as those featured in the Raisin UK marketplace. It’s also worth remembering that you won’t be able to top up your green savings bond once it’s opened, meaning you’ll need to deposit the full amount upon opening the account. If you’re looking for a savings accoun that lets you deposit and withdraw funds on a more regular basis while still enjoying competitive interest rates, you might want to think about a different type of savings account, such as a notice account or easy access savings account.
Are green bonds right for me?
Whether or not green bonds are right for you will be entirely down to your personal circumstances. If there’s a chance you’ll need access to your money during the term, they probably aren’t the best option for you (in this case an easy access savings account may be more suitable).
For you to decide what to invest in, you’ll first need to set out a budgeting plan, establish clear savings goals, consider your ethical standpoint and go about your research armed with all of these considerations.
Do you pay tax on green bonds?
Unlike tax-free savings accounts such as ISAs, interest you earn on green bonds is taxable. However, the personal savings allowance (PSA) means many people won’t pay tax on their savings interest anyway.
Introduced in 2016, the PSA allows basic rate (20%) taxpayers to earn up to £1,000 of interest per year without paying tax, while higher rate (40%) taxpayers can receive up to £500 a year in tax-free interest. Additional rate (45%) taxpayers don’t receive a PSA, meaning they’ll need to pay tax on any interest earned.
Is my money safe with green bonds?
Government green bonds are backed by the government, meaning your money is protected should anything happen. In terms of other green investments, you’ll need to check for any protection offered by your chosen institution. The majority of banks and institutions in the UK are part of the Financial Services Compensation Scheme, meaning that up to £85,000 of your funds are covered per person, per banking group, in the event of collapse.
What are the best green investments?
At the time of writing, in 2024, the NS&I Green Savings Bond is one of the only UK green bonds available on the market. In comparison to other three year fixed rate bonds, the interest rate for their green savings bonds is less competitive than other products with equivalent term lengths, so if earning interest is your priority, you could consider other options over the NS&I green savings bond.
Alternatives to green bonds
If you want to save money but you’re concerned about the financial activity undertaken by your chosen bank in terms of carbon footprint and climate action, you might want to consider ethical banking. Ethical banks have policies in place that prevent them from investing in certain types of companies, such as those that test on animals, employ child labour or make cigarettes. Ethical banks don’t just prevent money from going into these types of industry, but they also tend to take positive action. Many ethical banks, such as Gatehouse Bank, a Raisin UK partner bank, also promote environmental and social progression.
By opting to save with an ethical institution that provides total transparency in terms of investments, you’ll be saving money and helping the planet.