7mins read
Published on: Jul 24, 2024
#Financial Markets
Green finance is a crucial weapon for combating climate change.
Key Takeaways
• In 2023, climate change and our efforts to combat it fought a battle which ended almost in a draw. But humanity must win this battle to survive.
• Green finance is a crucial weapon for us to combat climate change.
• Whether in Europe or Asia, each region is embracing green finance for a sustainable future and a greener economy.
As far as climate change and our readiness to combat it are concerned, there are three key indicators you should immediately look at:
• 2023 was the warmest year on record, with the global average near-surface temperature of 1.45 °Celsius above the pre-industrial baseline.
• 2023 saw the global set of reference glaciers suffer the largest loss of ice on record since 1950.
• In 2023, the value of the global green finance market size stood at $4.18 trillion.
Inside Climate News made a particularly astute comment in a news piece in December 2023:
“The push and pull of progress and catastrophe made 2023 one of the most discordant—and consequential—years for the world’s climate... In 2023, clean energy progress and the horrors of a radically warming climate fought almost to a draw.”
In short, while the impact of climate change reached unbearable heights in 2023, so did our challenge to the ongoing catastrophe through progressive policies and green finance. The match was a draw, but humanity must win this battle to survive. As industry is the leading contributor to climate change, green finance is quickly assuming a greater role in the markets. But the real question is: Can green finance shape tomorrow's economy?
Firstly, it’s important to understand what green finance is. We have already covered the basics of green finance in a previous Academy article in detail.
So, a quick rewind—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.
• Put simply, green finance is a financial action or investment that contributes to an environmentally sustainable industrial ecosystem.
• Economic growth and ecological sustainability are the two defining features of green finance.
The most popular instruments of green finance are:
• Green bank
• Green bond
• Green loan
• Green mortgage
• Green credit card
Do you know that transitioning to a green economy could yield a direct economic gain of $26 trillion through 2030?
Green finance supports projects dedicated to environmental conservation, such as:
• Renewable and alternative energy
• Pollution control
• Biodiversity conservation
• Sustainable use of natural resources such as land, water bodies, etc.
The United Nations (UN) has been at the forefront of defining, formulating and implementing green finance policy. Though climate change has been an old concern, green finance has only picked up in the 21st century. The UN Framework Convention on Climate Change (UNFCCC) has emerged as the most important global platform for this purpose. Its supreme decision-making body is the Conference of the Parties (COP), which meets every year.
• Green finance finds the first official reference during the 2009 UNFCCC held at Copenhagen, Denmark.
• The Copenhagen Accord, established during the COP 15 in 2009, mentioned the Copenhagen Green Climate Fund.
• It was envisioned as a fund to combat the effects of climate change by assisting developing countries with climate change adaptation and mitigation activities.
• Next, COP 16 to the 2010 UNFCCC held in Cancun, Mexico established the Green Climate Fund (GCF).
• The fund was established as an operating entity of the financial mechanism of the Convention.
• It supports projects, policies and other activities related to mitigation in developing countries, such as:
• Reduce emissions from deforestation and forest degradation (REDD-plus),
• Adaptation,
• Capacity building, and
• Technology development and transfer.
• The COP 21 to the 2015 UNFCCC was held in Paris, France.
• 195 countries agreed to the historic Paris Agreement.
• It was here that the first green investment decisions were taken.
The GCF is permanently headquartered in Songdo, South Korea. Its ultimate goal is to keep the global temperature rise in this century well below 2 °Celsius or even 1.5 °Celsius above pre-industrial levels. So, what's its status?
• GCF has approved a total of 269 projects, with 100+ each in Africa and Asia Pacific (APAC).
• The total amount of approved projects under the GCF is $58.3 billion (including co-financing), of which $4.5 billion has been disbursed.
Note that GCF is only one of several such funds under the UNFCCC that are dedicated to combating climate change. The Adaptation Fund, the Least Developed Countries Fund, the Special Climate Change Fund, and the Global Environment Facility (GEF) are these other UNFCCC funds. However, GCF is the largest such fund; which is why we have focused so much on it.
(Confused between GCF and GFC? Well, the latter is the Global Financial Crisis of 2007-09. Click here to learn more about GFC.)
You might be wondering if the UN is the only global body that is engaging with green finance. But that’s not quite right. Other organisations, banks, and financial institutions also provide or manage green finance facilities to sustainability projects.
The European Investment Bank (EIB) is a major green finance player in the European Union.
• In 2007, it became the world’s first institution to issue green bonds. It also issues sustainability awareness bonds.
• The EIB uses the money raised through bonds to support renewable energy and energy efficiency projects exclusively.
• The green fund was crucial in raising private capital for low-carbon projects across Europe.
The International Bank for Reconstruction and Development (IBRD) has been working on projects dedicated to meeting the UN’s Sustainable Development Goals for decades.
• The IBRD issued its first green bond in 2008 and since then, it has issued $18 billion in green bonds.
• The bank allocates the amount equivalent to the value of green bonds to eligible activities that address climate change.
The World Bank launched the Pollution Management & Environmental Health (PMEH) Programme in 2015.
• The focus of the programme is air quality management and pollution control in five major urban areas in China, Egypt, India, Nigeria and South Africa.
• Green finance is an important component of PMEH which had an initial total allocation of $45 million.
The Association of Southeast Asian Nations (ASEAN) launched the ASEAN Catalytic Green Finance Facility (ACGF) in 2019 to accelerate green infrastructure investments in Southeast Asia.
• The ACGF provides ASEAN member governments access to over $1 billion in green loans from cofinancing partners.
• These green loans cover the upfront capital investment costs of commercially viable green infrastructure projects.
• These projects promote renewable energy, energy efficiency, sustainable urban transport, water supply and sanitation, waste management, and climate-resilient agriculture.
• The ACGF is owned by the finance ministries of the 10 ASEAN member countries and the Asian Development Bank (ADB).
• By the end of 2022, $504 million of the partner funds were committed to ACGF-eligible projects.
China is a major economy which has made green finance a prime focus.
• In fact, the clean energy sector contributed 40% to China’s gross domestic product (GDP) growth in 2023.
• Even President Xi Jinping has mentioned green finance in several of his speeches.
• In April 2024, the Green Finance & Development Center, FISF Fudan University, China published a report in collaboration with the Griffith Asia Institute that looked at the green finance trends in the Chinese market.
• Green loan balance reached $4.25 trillion during Q4 2023, constituting 12.7% of the total loan balance.
Green insurance premiums totaled $32.5 billion during Q4 2023.
However, nearly all green funds, including traditional mutual funds, index funds, and exchange-traded funds (ETFs), contracted in 2023.On a side note, China’s global Belt and Road Initiative (BRI) venture, that traverses several countries, is increasingly adopting a green finance model.
India raised $19 billion in sovereign green bonds across two maturities in 2023. (16k crore INR)
• According to a Fitch Ratings report, Green Social, Sustainability and Sustainability-linked (GSSS)-linked debt bonds in India accounted for $20 billion as of January 2023.
• The investment is a part of the country’s decarbonisation strategy.
In the United Kingdom, the Green Investment Group (GIG) is a private concern that provides green finance for environmentally sustainable infrastructure projects.
• These projects include installation of renewable energy units, construction of recycling facilities, and sustainable transportation.
• Barclays, Halifax, NatWest, VirginMoney, and other mortgage brokers offer low interest green mortgages. Only those purchasing energy-efficient homes (with an Energy Performance Certificates or EPC rating of A) are eligible for these green mortgages.
Future of Green Finance in the Global Economy?
Let’s look at how green finance instruments are contributing to our dream of a sustainable future.
• As per a Spherical Insights report, the value of the global green finance market size stood at $4.18 trillion in 2023.
• In 2023, green bond issuance topped $575 billion as per a Bloomberg report.
• As per a Bloomberg report, the world’s biggest lenders earned $3 billion in fees on green debts in 2023.
• The figures are not overwhelmingly high for other green finance instruments either.
It's obvious that we have a long way to way before green finance can catch up and address climate change in a more targeted manner. We have identified a few focus areas where green finance can be dedicatedly deployed for us to achieve our goal of a sustainable and carbon-neutral economy in the near future:
Decarbonisation is the process of mitigating CO2 and greenhouse gases (GHG) emissions through transition from fossil fuels to carbon-free, clean and renewable energy sources. Since the fossil fuel industry is among the leading contributors to pollution and climate change, governments have become very strict of late in the transition to a carbon-neutral fuel market. Carbon credit trading and offsetting is also popular in China and the EU, with the scheme gaining currency in other regions too. A project is supposed to contribute to a green project for a certain amount of GHG emission as a part of carbon credit trading.
The transition from fossil fuels to clean and renewable energy is a process undergoing across continents. Solar, wind and electric energy dominate the burgeoning clean energy market. New energy vehicles (NEVs) are also becoming quite popular among the public. Businesses, offices and homes—all are leveraging green finance instruments such as mortgages or loans to purchase and install clean energy units.
As people move away from plastic and other such non-renewable products, they are embracing eco-friendly or green products such as edible cutlery, bamboo tissues and paper bags. These products don’t leave a toxic imprint on the environment and easily decompose. Green banks have been quick to support start-ups that focus on creating eco-friendly products with green bonds and loans.
Nearly every business project now incorporates ESG concerns, and an ESG investing market has emerged to cater to these demands. Those businesses which want to lead change and earn a social standing on a global level are keen to leverage green finance to address ESG concerns.
Green finance is a financial action or investment that contributes to an environmentally sustainable industrial ecosystem.
The most popular instruments of green finance are:
• Green bank
• Green bond
• Green loan
• Green mortgage
• Green credit card
Green finance is first referred to at a global policy level during the COP 15 to the 2009 UNFCCC held at Copenhagen, Denmark.
The value of the global green finance market size stood at $4.18 trillion in 2023.
We have identified decarbonisation, clean energy, eco-friendly products, and ESG concerns as the key areas for green finance in order to shape tomorrow’s economy which can be sustainable and carbon-neutral.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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