National Savings & Investment (NS&I) has just launched a “green” savings bond.
It’s terrible value. You’d be silly to put your money in it.
But it does rather reveal what the purpose of “green” finance really is.
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You will almost certainly lose money after inflation if you put your money here
You can’t expect NS&I to pay market-beating interest rates – it has an unfair advantage over every other savings institution in that it is fully backed by the Treasury. This probably didn’t mean a lot to most of us until the financial crisis, but at that point people started to understand that there are certain circumstances in which your bank could conceivably go bust, which gave NS&I an extra competitive advantage.
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So you wouldn’t expect its new green savings bond to have offered a particularly exciting interest rate.
But even taking that into account, to invest in its new product, you’d have to be pretty committed to the idea of lending money to the government to spend on “green” stuff. Because at this rate, you are almost certain to lose money in real terms, even given NS&I’s tax and security advantages.
Inflation in the UK is currently running at anything from 3.1% to 5% depending on whether you prefer CPI (new money) or RPI (old money). Measuring inflation is a tricky business – everyone has a different rate and it’s very political too (you can read more about it here if you want to understand the differences more).
But, whichever way you look at it, 0.65% doesn’t even touch the sides in terms of compensating you for inflation. We’d have to have a pretty drastic bout of deflation within the next three years for 0.65% to be anything approaching reasonable – and, frankly, I can’t see that happening.
More importantly, you can already get higher-paying equivalent rates elsewhere. As various comparison services and savings experts point out, you can get three-year fixed-rate savings bonds that pay almost three times as much. I still wouldn’t want to lock up my money for three years at 1.8% (you’ll note that’s still well below inflation) but given the choice between 0.65% and 1.8%, it’s clear which is better.
Moreover, you can get 0.65% on some easy-access accounts too. So you don’t need to lock up your money for three years at all to get a massively-below-inflation savings rate. And as Rachel Springer of Moneyfacts.co.uk points out, those who want to save with some sort of moral element involved, “could also seek out mutuals which support local causes”.
In short, you can get similar products paying better rates elsewhere. It’s all very disappointing, reckon the personal finance writers.
Green finance is the future – and the future is financial repression
They’re right of course. This is a pitiful rate. I think you’d be daft to put money in it.
However, what people are perhaps missing to an extent, is that this is the point of green finance. In fact, it’s rather the point of “green” anything.
With a non-green investment product, what you care about is the money you can make. With a “green” investment product, in theory, you care about two things: the money you can make, and the good that you can do.
In other words, you’re getting two benefits, not one. And the way markets work, you have to think of the second benefit – the “do-gooding” – as being a “benefit-in-kind”. There’s even a name for it – the “green-ium” (as opposed to “premium”).
Now, there’s no such thing as a free lunch, so if you want to get a “green-ium”, you’re going to have to give away some of your financial return. Plenty of people are happy to do so, but it’s worth going into this with your eyes open.
That’s the first thing to understand. The second thing to understand is that this “green-ium” is going to be exploited very heavily by governments in the years and even decades to come.
To put it simply, governments are up to their eyeballs in debt. The situation was already pretty unpromising before the financial crisis and the pandemic made it a lot worse.
The best way to deal with this debt is to inflate it away. You can only inflate it away if people are willing to lend you money at interest rates which are lower than inflation.
How do you do that? You have to hold rates down somehow. This is known as “financial repression”. It’s hard to do because people don’t tend to volunteer to lend to you if they know they’re going to make a loss.
We’ve seen one way to do it: get a friendly central bank to lend money to you without asking any questions. That’s what we’ve been doing since roughly 2008. However, that’s going to be harder as inflation rises, given that central banks are meant to tackle inflation.
So what’s the solution? As MoneyWeek’s favourite financial historian, Russell Napier, has pointed out on several occasions, you force institutions to own government debt. And the nice thing about slapping the “green” label on them, is that you can now attribute a moral cause to the mandate (and let’s be honest here, you can slap a “green” label on pretty much all government debt and justify it in some way).
Your pension fund will be making a valuable contribution to preserving the environment for future generations. There’s almost something poetic about it, which I’m sure will be a comfort as you watch it lose money in real terms.
Anyway, what will be most interesting here is how successful this NS&I bond is. The thing about individual savers like you and I is that we don’t have green mandates to contend with. We don’t have to worry about regulators checking how green our lending book is (as is about to happen with mortgage loans, for example) and we don’t especially have to worry about our personal brand (well, most of us don’t).
So I’ll be very interested to see exactly how much value investors place on the “greenium”. And I’m sure the Treasury will be too.
By the way, this is a topic that will almost certainly come up in our discussions at the MoneyWeek Wealth Summit. Get your ticket here!
