Green Finance 101

Key Takeaways

• Green finance is a financial product or activity that is geared towards ensuring an environmentally sustainable industrial ecosystem.
   
• Economic growth and ecological sustainability are the twin components of green finance.
   
• Green finance is gaining currency among the business community in the 21st century.

In March 2024, the World Meteorological Organisation (WMO) released the State of Global Climate report:

• The report confirmed our fears that 2023 was the warmest year on record by a clear margin.
• It mentioned that in 2023, the global average near-surface temperature was 1.45 °Celsius above the pre-industrial baseline.
• Towards the end of 2023, over 90% of the ocean experienced heatwave conditions at some point during the year. 
  
   

Source: WMO

Do you know that industry is the leading contributor to climate change?

Industry, especially from sectors such as cement, steel and chemicals, emits greenhouse gases like CO2. To combat the growing threat of climate change, industry stakeholders have argued for pursuing green finance in policy so that their carbon footprint can be minimised.

Green finance is a component of industrial policy that deals with finance that aids and contributes to a sustainable growth of development - but there is more to it.

Let's learn about green finance in detail.

What is Green Finance?

To put it simply, green finance is a financial action or investment that is geared towards ensuring an environmentally sustainable industrial ecosystem. 

• Green finance is any investment or loan that is arranged to facilitate the growth of green enterprises and reduce the adverse effects of climate change due to any business project.

   

• Green finance offers the twin benefits of economic growth and ecological sustainability.

• Green finance spurs the demand for environmentally friendly products and services among individuals and businesses.

• Green finance doesn’t sacrifice our environment in the blind pursuit of development that can prove to be unsustainable in the long run. 

As per the United Nations Environment Programme (UNEP), green finance refers to the financial flows from the public, private and not-for-profit sectors to sustainable development priorities. 

Source: UNEP

As per the UNEP, the main areas for green finance are:

1. Supporting public sector on creating enabling environment,
2. Promoting public-private partnerships on financing mechanisms such as green bonds, and
3. Capacity building of community enterprises on micro-credit.

In general, the projects taken up under green finance are:

• Renewable and alternative energy
• Pollution control
• Biodiversity conservation
• Sustainable use of natural resources such as land, water bodies etc. 

Who's Behind a Green Finance Policy?

Primarily, there are three stakeholders of a green finance policy: 

Government

A government is supposed to propose, legislate and implement a comprehensive green finance policy.

It should not only regulate the sector through a strict regulatory framework but also encourage such businesses through economic tariffs and subsidies.

A government should also educate the general masses about the short-term and long-term benefits of opting for green finance in their everyday transactions. 

Business

Businesses bring the necessary capital, skills and work power that are crucial for the success of any sector; so, it also holds true for green finance.

Given that they are supported as well as regulated by the government, businesses can bring about a revolution by introducing green or sustainable products and services such as solar energy, new energy vehicles etc.

As of now, high risks and low returns in the green finance sector restrict businesses from investing in such ventures. 

Citizens

You, the citizens, are the most important force that can rally behind the green finance movement.

As everyone is getting impacted by the adverse effects of climate change, isn’t it wise that you become a part of the burgeoning low-carbon economy.

Not only are green products and services ecologically sustainable, but they also come with economic benefits such as subsidies, coupons, points, lucrative interest rates etc. 

Source: UNEP

But has anything substantial happened in this regard at the policy level internationally?

At the United Nations, the concern has found active listeners in the member states and has led to policy formation and action in the 21st century. 

The leading bodies at the United Nations have tried to frame policies as per green finance within the last two decades:

• We find the first official reference to green finance during the United Nations Framework Convention on Climate Change (UNFCCC) in 2009.
  
   
• The Copenhagen Accord, established during the Conference of the Parties 15 (COP 15) to the 2009 UNFCCC, mentioned the "Copenhagen Green Climate Fund."
  
   
• Next, COP 16 to the 2010 UNFCCC in Mexico established the Green Climate Fund (GCF) and designated it as an operating entity of the financial mechanism.
  
   
• It was during the COP 21 held in Paris, France in 2015 that the first green investment decisions are taken. 

Do you know that a total of 195 countries agreed to the historic Paris Agreement at COP 21?

Popular Financial Instruments of Green Finance

As the concept of green finance has gained currency in recent years, a few financial instruments have become popular in the segment: 

Green Bank

A green bank is a public bank or a non-profit financial body that focuses on financing green industrial enterprises or projects engaged in renewable energy, biodiversity conservation or other such environmentally sustainable initiatives.

A green bank is an important component of an environmentally conscious economy that spurs private investment in renewable and clean energy products.

A green bank is also referred to as a green investment bank or a clean energy bank. 

Green Bonds

Green bonds are fixed-income debt securities that can be purchased by smart customers as the incentives of these investments are deployed to support environmentally sustainable enterprises.

These projects include clean energy, ecological and biodiversity protection etc.

Green bonds are lucrative to investors due to their tax incentives in the form of credits and exemptions.

In 2023, green bond issuance topped $575 billion as per a Bloomberg report. 

Green Loan

A green loan is a fund lent by banks, usually at low interest rates, to support environmentally sustainable initiatives. It is also known as a sustainable loan.

Energy conservation, renewable or clean energy, and electronic vehicles are among the most prominent sustainable initiatives against which one can avail green loans.

As per a Bloomberg report, the world’s biggest lenders earned $3 billion in fees on green debts in 2023. 

Green Mortgage

A green mortgage is offered at low interest rates for house construction or modifications at residential or office spaces that are environmentally sustainable.

Not only are green mortgages available to first-time home buyers, but they are also available to those who are moving to other places and will buy houses there.

Such homes have higher green value and utility bills cost less there. 

Green Credit Card

A green credit card is a rather unique financial instrument in which your purchase points lead to a green initiative on the part of the said card company.

For instance, a green card company can invest in a plantation drive against the carbon footprint of the total purchases of its customer base.

Or a green card company can gift you points against your purchases which can only be redeemed to buy green products.

Often, these credit cards are made of recycled or biodegradable materials instead of plastic as the latter takes centuries to decompose.

Such steps, though seemingly small, contribute to a better environment in the long run. 

Benefits of Green Finance

The most obvious benefit of green finance is its contribution towards creating a low-carbon, environmentally sustainable economy, much emphasised so far in our article.

It fosters a worldview that is conscious of the impact of industrial activities on our environment and encourages a sustainable economic policy. Profit cannot come at the cost of the devastation of our present and future lives.

Next, we will have a close look at the other major benefits of green finance: 

Ready for Future

Opting for green finance makes businesses ready for the long-term challenges of the future, as the rate at which climate change is impacting our world is going to force governments worldwide to pursue a stricter green policy in the future, where such measures would be mandatory instead of voluntary.

It gives businesses a first-mover advantage in this direction. 

Institutional Support

Businesses pursuing green finance measures receive significant institutional support from the governments and other global bodies such as the UN in the form of low interest loans, subsidies and other incentives. So, it’s certainly not a disadvantageous economic venture as thought of by many. 

Better Branding

Businesses and enterprises focused on green finance can brand themselves as economically conscious brands as more and more customers are looking to opt for such products and services. Such kind of branding is a proven strategy for businesses looking to expand their customer base. 

What's Stopping the Growth of Green Finance?

If green finance is so lucrative to businesses and customers, what’s stopping its growth?

This question requires a deeper introspection on our part.

Sure, there are several advantages of green finance, but there are some major challenges too: 

Not Lucrative Enough

Pursuing green finance is still not perceived to be lucrative enough for businesses despite governmental support in the form of low interest loans or subsidies.

No business can run without profits and green finance is still seen as a hindrance by most businesses in their pursuit of money.

However, this wrong perception is being challenged by ventures which are adopting green finance measures and are demonstrating that they are successful, not despite, but because of following a green finance policy. 

Lack of Comprehensive Policy

The progress of formulating a comprehensive green finance policy has been slow on the part of both the governments and the businesses. It even began as late as the beginning of the 21st century; the damage due to climate change had been significant by then.

Besides, there is no consistency across different regions of the world when it comes to green finance policy.

Some regions emit a much larger share of greenhouse gases than others but are not ready to shoulder the corresponding responsibilities to follow a sustainable path of development.

Lack of Information

There is still a poverty of information in the industry and the public about the adverse effects of climate change.

We face the challenge of inadequate data collection regarding the impact of climate change. Temperature and global warming can be measures but several other components of ecological damage such as health can still not be adequately measured and reported.

Climate change denial, often due to industry lobbying, is not uncommon which adds to the confusion. 

Greenwashing

Greenwashing is false advertising in which the positive aspects of the green finance component of a business are exaggerated to attract a larger though naive customer base.

Suppose that a credit card company plants ten trees against every $1,000 spent by its customers. But it could be advertising it as a broader reforestation plan to its customers.

This is a widespread unhealthy practice in the market due to which customers increasingly doubt even the well-intentioned green finance measures. 

Future of Green Finance

Spherical Insights, a market intelligence research organisation, published a report in February 2024 that valued the global green finance market size at $4.18 trillion in 2023.

• China and the U.S. are the leading green bond markets in the world, accounting for 13.6% and 11.6% of the total green bond issuance between 2012 and 2021.

The study mentions that the market is expected to grow to $28.71 trillion by 2033 at a compound annual growth rate (CAGR) of 21.25% during the forecast period.  

• Governments are expected to contribute the largest share of the global green finance market during the forecast period.
   
• In terms of region, Europe is expected to have the largest share of the green finance market over the forecast period, thanks to the Sustainable Finance Action Plan of the European Union.
   
• The Asia Pacific (APAC) green finance market, led by China, Japan, and South Korea, is expected to grow the fastest during the forecast period. 

Frequently Asked Questions (FAQs)

Q. What is green finance?
A. Green finance is a financial action that is focused towards creating an environmentally sustainable industrial ecosystem.

Q. Who are the stakeholders of green finance?

A. The main stakeholders of green finance are government, business, and citizenry.

Q. What are the benefits of green finance?

A. The major benefits of green finance are:

• Environmentally sustainable future
• Low-carbon economy
• Institutional support for businesses

Q. What are the challenges to green finance?

A. The major challenges are:

• Lack of enough profits
• Lack of a comprehensive and consistent policy
• Lack of information
• Climate change denial
• Greenwashing

Q. What's the future of green finance market?

A. The value of the global green finance market size stood at $4.18 trillion in 2023 and is expected to grow to $28.71 trillion by 2033 as per Spherical Insights.