2024 was a great year for “green bonds” with the Actuarial Post stating that they “outperformed the conventional market by close to 2%”.
The future is looking bright for these investments, too. According to AXA IM, “The green bond market is poised to break new records in 2025 as net zero investment requirements remain massive.” Even changes by the Trump administration and an ESG backlash in the US are unlikely to impact the wider global outlook.
But what exactly are green bonds? And could they provide a low-risk way for you to align your money with your values on sustainable issues and still see a return? Read on to find out more.
Supporting investment into green projects and backing the drive towards net zero
Green bonds were first introduced in the UK back in 2021, as part of a Treasury-backed scheme designed to support the UK’s commitment to achieving net zero greenhouse gas emissions by 2050. The bonds help to finance government investment into “green” projects.
There are several ways to invest in these government bonds (or “gilts”) in a way that aligns with your values, including through the NS&I Green Savings Bond. Essentially, investing in one of these bonds means you’re lending money to the government. They then guarantee to use the money for green projects within two years of receiving it.
These investment bonds are set at a fixed rate for three years, currently standing at a respectable 2.95%. Initial rates in 2021 were a much-less appealing 0.65% (although they did peak at a high of 5.70% in 2023).
Essentially, anyone over 16 with a bank account can invest in a green bond. The minimum investment is £100, and the maximum is £100,000. The bonds have a 30-day cooling-off period, after which they accrue annual interest and pay out on maturity.
NS&I are the government-backed provider of premium bonds, and are often seen by investors as a “safe” option as all investments are fully protected.
What is your money used for?
According to the government’s UK Green Financing Allocation and Impact Report September 2023, NS&I green bonds raised £0.6 billion in 2022/23. This, along with funding raised via green gilts, was allocated across a wide range of sustainability projects.
These included projects in the fields of:
- Pollution prevention control
- Energy efficiency
- Living and natural resources
- Climate change adaptation
- Renewable energy
- Clean transportation.
These six key areas are identified in the UK’s Green Financing Framework guidelines as being eligible for green expenditure.
Green bonds could make an excellent addition to a diversified portfolio, offering security and low risk
Your investment portfolio with us benefits from diversification. Essentially, this means offsetting risk by not investing everything into one place. Creating and managing this balance can help to keep your investments steady as markets inevitably rise and fall, offering you a greater sense of security.
Diversification is usually across a number of areas, such as region, industry or asset class.
The four asset classes are:
- Equities
- Bonds
- Property
- Cash
This investment spread can help to minimise risk. But it also has the added advantages of reducing any regional bias, boosting your chance of returns, and consolidating any existing gains (for example, if accumulation levels start to drop as you near retirement).
Green bonds could make an excellent lower-risk addition to your diversified portfolio. In fact, a recent US research paper stated that “Portfolios with green bonds are less risky for all periods and allocation strategies.”
Plus, as a government investment, they are subject to intense scrutiny and required to have full transparency, meaning you can see exactly how your money has been spent. Two bodies are responsible for this: the Green Bond Principles (a framework for issuing green bonds) and the UK Green Financing Programme. The latter ensures disclosure on how funding is used and evaluated, so you can see the measurable outcomes and results from your bonds.
As well as their strong diversification properties, green bonds can help you balance your portfolio to match your personal ethics.
A May 2023 report by the Office for National Statistics (ONS) revealed that 64% of UK adults were worried about climate change. Aligning your values with your investments in the shape of green bonds helps you to combine commercial benefits with a sense of social responsibility.
Get in touch
Ultimately, the 2025 outlook for green bonds remains positive, even with volatile factors and an unpredictable political landscape continuing to be at play. As more of us seek to align our personal values with our finances, green bonds act as a bridge between money and ethical concerns, marrying returns and rewards with a sense of wellbeing.
Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you manage your long-term financial plans in a way that aligns with your values.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
