The inaugural UK green savings bond will offer buyers a lower return on their investment than competing products as the government banks on investors’ environmental commitment to drive demand.

National Savings & Investments, the government-backed savings scheme, said its first green bond, which goes on sale on Friday, will come with a fixed rate of 0.65 per cent over three years.

Dubbed a “guilt-free gilt”, after the golden edge on traditional UK debt certificates, proceeds from the bonds will fund government spending on environmental projects such as investing in renewable energy, green transport infrastructure and preventing pollution, NS&I said.

“The UK is already a world leader in green finance and these innovative new savings bonds will deliver both financial returns and environmental benefits, in a transparent and secure way,” said chancellor Rishi Sunak, who has pushed for the launch of UK green bonds to signal the UK’s commitment to environmental finance ahead of the COP26 climate conference next month.

However, investment analysts have warned that the green bonds may struggle to win demand from rate-sensitive retail investors if the return on offer is lower than savers can find elsewhere.

“If the rate is below 1.8 per cent, the bond’s green credentials and its NS&I brand and backing are going to have to do the heavy lifting rather than the rate,” said Laith Khalaf, head of investment analysis at AJ Bell.

Khalaf calculated last month that it would cost the Treasury £210m per year to match the leading bank savings bond rate of 1.8 per cent.

In the past, NS&I savings bonds typically offered higher rates compared with the cost of government borrowing in bond markets. But it scrapped some of its most popular savings products two years ago, saying that very low gilt yields had made it substantially cheaper for the government to raise the funds from big investors rather than individual savers.

NS&I’s market share fell after it slashed rates for retail savers from a more competitive 1.15 per cent on its popular income bond to 0.01 per cent.

Becky O’Connor, head of pensions and savings at Interactive Investor, said the green bonds might “offer a feel-good factor for savers” but that the rate was “not competitive”.

The green bond rate is not only well below the best rates on retail savings products, it also means savers would be getting less than the yields offered to government bond investors, with three-year government debt currently yielding 0.68 per cent.

The launch comes at a time when bond yields have risen rapidly as investors react to hints from the Bank of England that it could raise interest rates as soon as next month. A month ago the three-year gilt yielded as little as 0.25 per cent.

The prospect of rate rises could also weigh on retail investors’ enthusiasm for the green savings bonds, which require them to lock away their money for three years.

Some environmental advocates have criticised the government green-tinted debt plans as a “PR exercise”. They argue the government should tap debt markets at the best available rates to fund its environmental plans.

The UK government has also recently launched a green borrowing programme aimed at financial markets, raising £16bn from two sales of green gilts. Bond investors have so far proved willing to pay a small premium for these bonds — in the process accepting a marginally lower yield — over conventional government debt.

NS&I said the green bonds will be on sale for at least the next three months and open to investments between £100 and £100,000.

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