Green ISAs: it’s not too late to resurrect an inspired idea

It’s been six years since the then-shadow chancellor George Osborne proposed the idea of green ISAs to encourage public engagement with, and inject capital into, the green economy.

At the time Osborne said, “Green ISAs will engage the public in a new way in the issues around climate change and show them very clearly the economic benefits of green investment.”

He was right. They very likely would have, while raising significant funds for investment in sustainable enterprise. Except in 2011 the once key Tory policy was dropped, never to make it into the chancellor’s budget box.

Fast forward to March this year, and the House of Commons environmental audit committee highlighted a significant green investment gap in its report on green finance. The report stated, “The current level of green investment is running at less than half of the level needed to deliver the decarbonisation implicit in national and international targets. A significant scale-up is needed.”

The gap is estimated to be between £10-12 billon a year, a ‘green deficit’ which grows every year insufficient investment is made into low-carbon generating assets and infrastructure. Green ISAs, if resurrected, could help fill that hole.

More than £57 billion was invested in ISAs in the last tax year alone, by 14.6 million subscribers. It’s not inconceivable that with the right incentives, in excess of £12 billion could be redirected into the green economy, each and every year.

Osborne’s original proposal was to extend the ISA allowance, which is currently £11,520, by £1,000–3,000 if invested in green ISAs. But it could be that an even lower increase could still boost investment in the green economy, with a few provisos.

To maximise the money injected into the sustainable economy, while minimising the cost of the tax relief to the exchequer, all money invested in a green ISA should be ring-fenced to green projects, not just the uplift.

The latest figures, from 2010/11, showed that 31% of cash ISA and 36% of stocks and shares ISA subscribers saved or invested the maximum amount possible. It is not at all unreasonable to assume that should the limit be raised even a relatively small amount, many of these would opt for putting the higher amount in a green ISA rather than less in its conventional equivalent.

All banks and building societies would have to be able to offer green ISAs, as long as they’re then able to use the funds to productively contribute to the green economy.

For a while, green ISAs were proposed as a way of funding the Green Investment Bank, which would put all the money raised with a single institution and create a bottleneck in terms of their capacity to distribute the funds. By enabling all banks to offer green ISAs, they become a mass market product with mass appeal. And banks would start to find that a significant, and growing, proportion of the money in their ISAs is ring-fenced to the green economy.

Finally, banks would have to be bound to using the money raised through green ISAs to finance new sustainable assets and infrastructure. Otherwise we’re likely to see banks going through their portfolios and retrospectively finding projects that fit the criteria, rather than getting the new money out and supporting the transition to a low-carbon economy.

The reality is that when green and tax do get a mention together in the budget on Wednesday, it will be in the context of the easing back of environmental taxes (whatever you choose to call them), sacrificed for the sake of growth and a more ‘resilient economy’.

The real shame is that green ISAs could help to provide both of these with little or no cost to the exchequer. And throw in a populist tax break for good measure.

Will Ferguson is head of communications at Triodos Bank.

Further reading:

Green businesses call for sustainable ISA incentives

2014 could be ‘perfect time’ to invest in an ISA

Treasury looks to extend ISA reach to peer-to-peer finance and crowdfunding

Consider sustainability and ethics when investing in ISAs this year

First UK Islamic ISA gives consumers ethical tax-free way to save