Savers hit by a series of rate cuts are increasingly looking for ways to get a regular return on their cash.
The stock market offers dividends, but these can be cut at any time, while in the world of bonds they have a choice between ‘safe’ government bonds paying miniscule rates, or riskier corporate bonds with higher yields but a greater risk they will lose their money if the company goes bust
Somewhere in the middle of this risk vs reward scenario, lies a new type of local government-backed green bond. Local authority green bonds use savers’ cash to invest in local renewable energy infrastructure, with returns of 1.2 per cent on offer to those prepared to fix for five years.
They are the brain child of Bruce Davis, co-founder of Abundance Investment, an established platform that lets investors directly back renewable energy projects. He explains more about local authority green bonds.
Bruce Davis says solar generation will not only green the council’s energy supplies but provide an income for core services over the next 30 years
The decision by National Savings and Investments to slash the rates of interest on all their accounts and bonds has left savers and investors angry, especially as almost £20billion was lent to the UK government via NS&I after a rate cut was postponed in May and the products topped the best buy tables over the summer.
Back in July, we wrote a blog for our customers highlighting that such rates were not sustainable and were allowed only by the special measures surrounding the response to Covid-19.
Bruce Davis, Abundance Investment
But that won’t stop many feeling that an organisation like National Savings should not engage in what the Financial Conduct Authority in other situations would characterise as ‘teaser’ rates – a practice they actively discourage and frown upon.
None of this changes the situation that many people, worried about current uncertainties, are seeking safe havens for their savings, whether via National Savings, or keeping cash on hand in the bank, backed as it is by the Financial Services Compensation Scheme.
Ultimately the effects of quantitative easing – Bank of England speak for ‘harvesting the magic money tree’ – will keep rates low for the foreseeable future.
It was inevitable that the government could no longer justify the multi-billion pound taxpayer-funded subsidy of savings rates for what is a practically zero risk investment.
Not when the government can in some cases require a charge for lenders to hold its bonds.
The eminent deceased – yet newly fashionable – economist, JM Keynes, coined the phrase the ‘paradox of thrift’; a situation where individuals hoarding cash has the effect of making us all worse off, as there is less money circulating and being spent or invested in the economy.
However, in many ways it is the apathy caused by overall low interest rates for cash that is the real danger.
The fact being that your money is still working, still having an impact on the world even if it is earning a pittance.
This is because your money doesn’t sit idle whether it is in a bank or National Savings account.
You are effectively lending that money to the bank or the government and therefore in part you are helping to fund the things that bank or government in turn decide to finance.
In the case of National Savings that money goes into the general investment account of the UK government.
Here it can be used on anything from smart motorways to our nuclear deterrent. At the time of the rate cut announcement, UK savers had lent more than £180billion to the UK government, leaving many to doubt their choice of safe haven.
Green bonds on offer
Two green bonds have been issued already this year, one by West Berkshire local authority and the other from Warrington, with Abundance Investment facilitating.
Both are fully regulated by the Financial Conduct Authority, guarantee to pay 1.2 per cent interest for their five-year term and are considered low risk as they are backed by the local council issuing them.
The green bonds are also transferable, so investors can sell their holdings on to others during the five-year term for free via the Abundance Marketplace.
Leeds local authority is set to launch soon, and Abundance confirms it has a number of further local council green bonds ‘in the pipeline’.
But what are the alternatives?
Can you diversify your cash or low risk investments in the same way you diversify your shares and funds?
In other countries, such as USA, Germany and Sweden, small investors can lend money to local and state governments as well as central governments.
Local councils are again turning to local residents to finance investments in infrastructure, targeting green projects
Ironically, the UK was a pioneer of this type of investment, with the first local council loans being sold to investors in the 1870s.
However, the practice died out as the cost of administering the bonds became prohibitive in the 1990s and it became easier to borrow through the Public Works Loan Board, which manages the UK government’s lending to local councils.
A full 150 years after those first loans funded the growth of our major towns and cities, local councils are again turning to local residents to finance investments in infrastructure, targeting green projects which contribute to their stated aims to achieve net zero – carbon neutral – by 2030.
Local government green bonds
Investors can now buy bonds issued direct from the local council, called community municipal investments, via an FCA-regulated investment platform.
My own company, Abundance Investment, worked with the University of Leeds and with funding from the UK government to develop these products and launched the first two pilot local government green bonds from West Berkshire and Warrington councils in July and August respectively.
The bonds are backed by the council, which means that they are a low risk way to ensure your money is aligned with what the majority of people in the UK see as the number one priority after the pandemic, namely the climate emergency.
The money is being used to build solar generation which will not only green the council’s energy supplies but provide an income for core services over the next 30 years as well.
The new normal may well mean low returns for savers and low risk investors, but it doesn’t mean that we can’t put some of our money to work locally and help municipal authorities lead the effort to restart our Covid-blighted economy and at the same time make progress tackling the bigger long term goal of achieving net zero.