Climate change has emerged as the defining political and economic problem of this century and it is likely to stay so for the foreseeable future. Governments, investors, businesses, and private individuals worldwide are beginning to take action in response to the climate issue, especially on decarbonization techniques. Moving to a low-carbon or green economy would need extraordinary levels of fresh capital investment, notably in the form of green financing, to support activities that cut GHG emissions and assist firms in adapting to the effects of climate change. That makes it important to understand what is green finance and how it matters.
What is Green Finance?
Simply put, green finance is a loan or investment that promotes environmentally-positive activities, such as the purchase of ecologically-friendly goods and services or the construction of green infrastructure. As the hazards connected to ecologically destructive products and services rise, green finance is becoming a mainstream phenomenon.
Why Green Financing?
Green finance delivers economic and environmental advantages to everybody. It broadens access to environmentally-friendly goods and services for individuals and enterprises, equalizing the transition to a low-carbon society, resulting in more socially inclusive growth. This results in a ‘great green multiplier’ effect in which both the economy and the environment gain, making it a win-win situation for everyone.
Types of Green Financing
Now that we have an understanding of what is green finance, let’s explore its different types:
They allow lenders to provide better terms to home purchasers of properties with a high environmental sustainability rating or if the buyer agrees to invest in enhancing the environmental performance of a property.
These are loans used to support environmental initiatives such as household solar panels, electric automobiles, energy efficiency projects, and more.
Green Credit Cards
Green credit cards such as Aspirations’ Zero card plant a tree every time a customer makes a purchase. They enable customers to direct their expenditure toward green finance in order to have a lasting impact on the environment.
Green banks operate similarly to traditional banks, but they employ public funds to spur private investment in renewable energy and other environmentally friendly initiatives. According to a 2020 research, the number of green banks in the US increased from one to 20 between 2011 and 2020, investing $7 billion in renewable energy.
Green bonds account for the vast bulk of green funding. They include bond investments, the earnings from which are used to support a variety of green initiatives such as renewable energy, clean transportation, and conservation, among others.
Benefits of Green Finance
Encourages Spread of Technologies and Development of Environmentally Friendly Infrastructure
Governments of developing countries are constructing infrastructure that will improve long-term resource management, increase a country’s competitiveness and channel private sector money into local green markets.
Produces a Comparative Advantage
In response to mounting challenges from climate change and other environmental and economic issues, a low-carbon green development may unavoidably shift from a voluntary to an obligatory strategy. Expanding green financing will give you a competitive advantage when environmental regulations tighten.
Adds Business Value
Businesses can enhance the value of their portfolio by increasing (and advertising) their participation in green financing. It offers their company a green edge, attracting more environmentally concerned investors and customers.
Enhances Economic Prospects
Governments that promote green financing assist in protecting their societies from scarcity of resources. They do this by building and encouraging local markets for renewable energy, as well as entering new markets with high employment potential.
Green Finance: Risk and Opportunity
The shift to a low-carbon economy necessitates significant investments, which can only be funded through profound private-sector engagement. The incorporation of Environmental, Social and Governance (ESG) factors into private investments transforms a risk management strategy into a driver of innovation and new possibilities that provides long-term value for the company and society. However, capital mobilization for green investments has been constrained due to a number of microeconomic obstacles. These include maturity mismatches between long-term green investments. Additionally, the typically short-term time horizons of investors also impacts capital mobilization. Further, financial and environmental policy approaches are not always integrated.
Most significantly, a standardized definition of ‘green’ and a taxonomy of green activities are required to assist investors and financial institutions in allocating money effectively and making educated judgments. To avoid ‘greenwashing’, the notion of green financing should be more explicit.
A uniform set of basic green finance criteria is also required to shift capital flows toward green and sustainable initiatives, as well as for market and risk monitoring and benchmarking. Additionally, green finance assets might benefit from disclosure standards and norms. Voluntary green finance concepts and standards, supplemented by legislative incentives, must be applied and monitored across all asset classes.
Green Finance vs Sustainable Finance
While sustainable finance refers to financial tools that serve environmental and social goals, green finance is entirely concerned with environmental objectives. According to Bloomberg, sustainability and green financing accounted for one-third of all money movements in tracked assets under management in 2018, totaling $30.7 trillion.
The great majority of emissions emitted by investors are funded or from loans, investments, and other financial activities. Funded emissions contribute 700x more to the carbon footprint of financial organizations than operational emissions do. Green financing for investments, loans, and credit cards can help cut emissions.
Green Finance in Banking Sector
Awareness of what is green finance has helped grow its relevance in the banking sector. Both commercial and investment banks are starting to take action in this regard. The actions include mainstreaming environmental factors into bank strategy and governance. It also includes mobilizing capital for specific green assets through loan origination, credit and savings product provision, and capital markets activities such as green bonds. This development is being driven by a variety of worldwide efforts, including the Principles for Responsible Banking and the Sustainable Banking Network.
Multilateral Development Banks (MDBs) also play an important role in mobilizing international climate funding and increasing financial leverage for low-carbon and climate-resilient projects. They do this through strengthening public and private investment planning, preparation, structure, financing, and de-risking. Many have made bold pledges to guarantee that their loan portfolios support conservation efforts and that natural capital and social consequences are factored into their investment decision-making processes.
Products of Green Finance
- Green car loans
- Green mortgages
- Green home equity loans
- Green certificate of deposits
- Green cards
Green Finance Examples
These are bonds issued by governments, companies, or organizations to fund environmentally-friendly projects such as renewable energy, energy efficiency, and sustainable land use. Investors receive a financial return while also supporting projects that have a positive environmental impact.
Sustainable Investment Funds
These are mutual funds or exchange-traded funds that invest in companies or projects that have a positive environmental impact. By investing in sustainable investment funds, individuals or organizations can support environmentally-friendly initiatives while also potentially earning a financial return on their investment.
To summarize what is green finance, it can be described as a way for businesses and customers to minimize their carbon impact without burning a hole in their pockets. There are several types of green finance accessible to asset owners and enterprises. To learn more about this subject, explore Emeritus’ online courses on finance.
By Siddhesh Shinde
Write to us at content@Emeritus.org