What is green finance and why is it important?

Green finance is blossoming. 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 – but what is green finance and how does it work?

At its simplest, 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 minimize the impact on the climate of more regular projects. Or a combination of both.

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 organizations 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:

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 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.

At a national level, too, central banks are making noises about prioritizing greener investment. The Swedish Riksbank has begun divesting fossil-based holdings, selling bonds from some Australian and Canadian provinces.

“The Riksbank needs to analyse and manage the economic consequences of climate change,” the bank’s deputy governor Martin Flodén said in November 2019. “We can contribute to the climate work to some extent by giving consideration to sustainability aspects when investing in the foreign exchange reserves.”

The City of London Corporation, in collaboration with the Green Finance Institute, and supported by the World Economic Forum, is this month hosting the Green Horizon Summit, a virtual event looking at the role of green finance in the recovery from COVID-19.

The summit will explore ways to ensure public and private finance is used to back the transition to a sustainable and resilient future for all.