Green Finance is any structured financial product or service created to ensure a better environmental outcome. This can be in the form of stocks, insurance, a loan, debt or investment. So long as it is used to encourage the development of green projects, ensure a better environmental outcome or minimise the impact on the climate of more regular projects.
In the last few years, green finance has gained increasing relevance. This is mainly due to the urgency of financing climate change mitigation and adaptation efforts, and the scale of sustainable development projects around the world. Green finance is seen as a means of simultaneously meeting the needs of environmentalism and capitalism.
WHAT TYPES OF PRODUCTS AND SERVICES ARE BEING DEVELOPED?
GREEN BONDS
A popular green finance product is the green bond. These are an emerging way to raise debt capital for green projects. Green bonds are fixed income, liquid financial instruments. They are dedicated exclusively to climate change mitigation and adaption projects, and other environment-friendly activities.
The prime beneficiaries of green bonds are renewable energy, energy efficiency, clean transport, forest management, water management, sustainable land use and other low-carbon projects.
To qualify as a green bond, a bond must meet criteria. These cover the use and proper management of proceeds, a process for project evaluation and selection and offer detailed reporting. The global green bond market is estimated by some to reach $2.36 trillion by 2023.
KEY BARRIERS TO OVERCOME
A lack of awareness and inadequate technical capacities of financial institutions are two key barriers facing many developing countries. Many banks are not familiar with the earnings and risk structure of green investments. This makes them reluctant to grant loans or to offer suitable financing products.
With rising popularity of green finance, financial institutions will quickly need to adapt to funding requirements of environment-friendly projects.
UK INITIATIVES
Back in 2015 the London Stock Exchange became the world’s first exchange to introduce a dedicated green bond segment. It is home to the first certified green bonds from China, India and the Middle East. Plus the first sovereign green bonds from Asia Pacific and the Americas.
Then in 2019, it expanded the green bond segment into a Sustainable Bond Market (SBM) to incorporate sustainable, social and issuer-level segments. The SBM offers issuers a wide range of opportunities for sustainability-related debt instruments, and investors improved access and transparency.
Last month the UK Government announced it will set up green finance hubs in London and Leeds. This is part of its efforts to encourage lenders and insurers to invest in renewable energy and sustainable agriculture. The two cities will host the new U.K. Centre for Greening Finance and Investment.