Green Finance

The effects of climate change are causing damage to the environment and disrupting economies around the world.The banking sector can play a crucial role in achieving climate goals through green financing. 

Green finance is any structured financial activity – a product or service – that’s been created to ensure a better environmental outcome. It includes an array of loans, debt mechanisms and investments that are used to encourage the development of green projects or minimise the impact on the climate of more regular projects. Or a combination of both.

"Green finance is a broad term that can refer to financial investments flowing into sustainable development projects and initiatives, environmental products, and policies that encourage the development of a more sustainable economy. Green finance includes climate finance but is not limited to it. It also refers to a wider range of other environmental objectives, for example industrial pollution control, water sanitation or biodiversity protection. Mitigation and adaptation finance is specifically related to climate change related activities: mitigation financial flows refer to investments in projects and programs that contribute to reducing or avoiding greenhouse gas emissions (GHGs) whereas adaptation financial flows refer to investments that contribute to reducing the vulnerability of goods and persons to the effects of climate change.

Funding sustainable development

For the United Nations, green financing plays an important role in delivering several of its Sustainable Development Goals. Its Environment team is already working with public and private sector organisations in an attempt to align international financial systems to the sustainable development agenda.

Some of the activities UN Environment is involved in include helping countries re-engineer their regulatory frameworks – so that green borrowing becomes compliant, for example – and helping steer public sector planning in a more environmentally friendly direction.

Clean sources of energy can be brought to fruition through the right combination of planning consent, strategic priorities and availability of capital. Such projects could be given preferential treatment to make them a more attractive option than, for example, fossil-fuel derived energy infrastructure.

Typical projects that fall under the green finance umbrella include:

• Renewable energy and energy efficiency
• Pollution prevention and control
• Biodiversity conservation
• Circular economy initiatives
• Sustainable use of natural resources and land

One common green finance instrument is the green bond. There is a code of conduct that defines what constitutes a green bond.  To qualify, a bond must adhere to a criteria on the use of proceeds, have a process for project evaluation and selection, ensure proper management of any proceeds, and offer detailed reporting.

The US, China and France are the three biggest issuers of green bonds. Presently, the European Central Bank holds around 20% of all euro denominated green debt, even though it only started buying corporate bonds as recently as 2016, which indicates that the bank sees this as a way to further its own green agenda.

Green bonds work like regular bonds with one key difference: the money raised from investors is used exclusively to finance projects that have a positive environmental impact, such as renewable energy and green buildings.

How big is the green bond market?

The first green bonds were issued in 2007. The market grew slowly for nearly a decade, but then it started to take off. Global green initiatives such as the Paris Agreement on climate change and the UN Sustainable Development Goals have helped spur this expansion.

Strong demand for green bonds is also driving growth, with major investors from asset managers to insurers and pension funds keen to scoop them up. Just look at that EU deal: orders exceeded the securities available for  more than 11 times. Such is the demand that it can cost less to issue green bonds than the conventional variety.

The green bond market is expanding rapidly. Annual issuance could hit $1 trillion in 2023, according to the Climate Bonds Initiative. That’s a big milestone, though it’s still just a niche in the overall global bond market, which has been estimated at about $130 trillion. So there’s plenty of room for green bonds to keep on growing.

India is committed to achieving net-zero emissions by 2070 but its projected economic growth presents huge challenges. India has announced in the 2022 union budget , will issue sovereign green bonds for funding green infrastructure, The money will be used for projects that will help reduce carbon intensity of the economy. Finance minister also mentioned ,Sovereign green bonds will be part of government’s borrowing programme in FY23 to deploy in public sector projects. The move is big boost especially with India making aggressive strides towards a low-carbon economy with ambitious targets like achieving a robust 500 gigawatt of renewable energy capacity by the year 2030 and reduce the carbon intensity to 45%. The Prime Minister also committed in cop26  to bring down projected carbon emissions by 1 billion tonnes between 2021 and 2030. Such targets require massive funding. The goal, according to the Council on Energy, Environment, and Water (CEEW) will need investments upwards of $10 trillion in order to achieve net-zero by 2070. These investments would help decarbonise India’s power, industrial, and transport sectors. The CEEW also estimated that India could face a significant investment shortfall of $3.5 trillion in its net-zero ambition.

Banks should, play a vital role in meeting these investment targets or plugging any gaps. Also, banking is a sector on the frontline – facing the impacts of climate change, as it is estimated that the financial services industry would account for a massive 72% of the total potential financial impact of the change.

Today, technology plays a pivotal role in net-zero transition for several sectors and is evolving rapidly. Some areas include electrifying transportation, making energy efficient buildings, reducing GHG emissions from the industrial and agricultural sectors, remaking the power grid to supply clean electricity, hydrogen fuel cells and expanding carbon capture, use and storage – all of which require a strong financial boost of up to $ 2 trillion for a faster transition towards net-zero.

India acknowledged the importance of green financing in 2007. Subsequently, the Reserve Bank of India devised policies to encourage banks to align with sustainability goals. In 2015, the central bank included small renewable energy projects under the Priority Sector Lending scheme. In response, Indian banks devised internal policies to reduce their lending to carbon intensive sectors and adopt a green finance approach to credit. This has also led to some carbon-intensive sectors rethinking their business models and turning to green production methods.