Green Finance and its impact.
Malyaj Kaushal
Supply Chain Enthusiast || Micron Technology India || IIM Mumbai || IIT-Delhi || ISB- Hyderabad || Ex- JSW Steel, Vijayanagar
The Earth's increasing temperature over the past few decades threatens every form of life, as much as it poses a risk to businesses and economies. The UN Environment Programme predicts that global temperatures could rise over 3°C this century if we continue business as usual. Any loan or investment that helps in supporting green activities comes under this type of finance. The International Monetary Fund is offering support to promote green finance.
Typical projects that fall under the green finance umbrella include:
"Green Finance can only go upward and onward. We can expect the subsequent capital flows to accelerate climate mitigation"
-Chaoni Huang
Head of Sustainable Capital Markets
Supporters of green bonds believe that they can provide long-term project once it has passed through the construction phase ( Natural Resources Defense Council (NRDC) 2016). The US, China and France are the three biggest issuers of green bonds. It is estimated that the green bond market could go up to $2.30 trillion in the coming years. An important consideration is the financial governance policies through which central banks can address environmental risk and promote sustainable finance (Dikau and Volz 2018).
New financial technologies (“fintech”) could unlock green finance. According to Nassiry (2018), there are three applications of fintech to green finance: blockchain applications for sustainable development; use-cases for renewable energy; and innovation in financial instruments.
Green Finance, especially Green Bonds, could very well be the future of the financial sector. The need of the hour is to create a regulatory framework and credit rating agencies. This will help the proper utilization of funds with the given objectives rather than the diversion of funds in the name of green investments (greenwashing). Moving ahead, time will be the judge of whether this form of economy and finance will succeed or not, and how much will it contribute to achieving SDGs.??
According to the Global Environment Facility, an estimated $400-600 billion per annum is needed to finance the conservation of land, forests and water, and more than $350 billion of incremental capital to fund renewable energy. However, there’s a large gap between the required capital and the actual capital flows: the latest accounting of climate finance suggests the financing gap be in the region of $70 billion, while anecdotal evidence among practitioners suggests this may be a conservative estimate.
Globally, the green bond market could be worth $2.36 trillion by 2023. It is regarded as a way of meeting the needs of environmentalism and capitalism simultaneously. Green finance includes an array of loans, debt mechanisms, and investments that are used to encourage the development of green projects.
Typical projects that fall under the green finance umbrella include:
In recent years, new methods for financing green projects have developed, including green bonds, green banks, village funds, etc. The advantages of green banks include offering better credit conditions for clean energy projects, the ability to aggregate small projects to achieve a commercially attractive scale, the creation of innovative financial products, and market expansion through the dissemination of information about the benefits of clean energy. Supporters of green bonds believe that they can provide long-term, reasonably priced capital to refinance a project once it has passed through the construction phase and is operating successfully (Natural Resources Defense Council 2016).
The US, China and France are the three biggest issuers of green bonds. It is estimated that the green bond market could go up to $2.30 trillion in the coming years. Along with Green Bonds, carbon market instruments are also a popular tool of green financing. In addition to green tools, one could see a surge of green financial institutions, such as green funds and green banks.
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Responsibility for financial and macroeconomic stability lies with central banks, which ought to address environmental risks at a systemic level. Furthermore, central banks are in a powerful position to support the development of green finance models and enforce adequate pricing of environmental risks by financial institutions. An important consideration is the financial governance policies through which central banks and financial regulatory agencies, can address environmental risk and promote sustainable finance (Dikau and Volz 2018).
Green financing is to increase the level of financial flows from the public, private and not-for-profit sectors to sustainable development priorities. A key is to better manage environmental and social risks, take up opportunities that bring both a decent rate of return and environmental benefit, and deliver greater accountability. This could be promoted through changes in countries’ regulatory frameworks, harmonizing public financial incentives, increases in green financing from different sectors, alignment of public sector financing decision-making with the environmental dimension of the SDGs and increased use of green bonds etc.
The growth of this type of financing will help in the creation of more jobs and business opportunities and will ultimately lead to better human life and facilities as well as sustainable developments without spoiling or destroying nature. New financial technologies (“fintech”), such as blockchain, the Internet of Things and big data, could unlock green finance over the same timeframe as the SDGs. According to Nassiry (2018), there are three possible broad applications of fintech to green finance: blockchain applications for sustainable development; use-cases for renewable energy, decentralized electricity markets, carbon credits and climate finance; and innovation in financial instruments.
Often short-term time horizon of the investors does not match with the long-term green investments. There always remains an issue regarding proper coordination, cooperation, and alignment of financial and environmental objectives. Several changes are required in the nation’s regulatory framework for green financing. Further, aligning public sector financial decisions with sustainable development objectives and encouraging different sectors to participate is another vital step that needs to be taken up consciously. A boost in investment in clean and green technologies and usage of green bonds will drive green finance as structured in a better manner.
Green Finance, especially Green Bonds, could very well be the future of the financial sector. It will play a leading role in the march towards net-zero (minimum greenhouse gas emissions). These bonds are one of the best ways to meet the needs of environmentalism, as well as capitalism. However, there is a need for minimum standards for this type of finance to ensure its long-term effectiveness and benchmarking of risk. The need of the hour is to create a regulatory framework and credit rating agencies. This will help the proper utilization of funds with the given objectives rather than the diversion of funds in the name of green investments (greenwashing). Moving ahead, time will be the judge of whether this form of economy and finance will succeed or not, and how much will it contribute to achieving SDGs.?