UNDERSTANDING GREEN FINANCE
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- 27 July 2016
Every institution on the face of earth today is hinged on finance either directly or indirectly. This makes money central to the creation of sustainability.
The sustainability of man is a global issue and it is from that realization that organizations like the United Nations, World Health Organization (WHO), International Labor Organization (ILO), International Finance Corporation (IFC), the World Bank and so many more, were established to bring coherence on this issue. Accordingly, the UN as the biggest global body in cooperation, with the other organisations, use finances from various avenues to address the various facets of sustainability of man through its various divisions.
Today however, one of the world’s most pressing issues is climate change. In fact, according to IFC Vice President for Global Client Services, Nena Stoiljkovic, at the Green Finance Forum in November, 2015, by 2030 over 100 more million people could be living in poverty as a result of climate change.
The United Nations Framework Convention on Climate Change (UNFCCC), mandated to handle all matters pertaining climate change, has been working tirelessly on this and finally in December, 2015 at the COP21 in Paris, it witnessed the biggest climate change success of all time, with 195 countries committing to fighting climate change.
The bigger issue now lies in how to implement these commitments, and where the finances will come from. In its climate change report “Shock Waves”, the World Bank stated that mitigation costs are likely to range from $140 to $175 billion per year by 2030 while the World Economic Forum projects that by 2020, about $5.7trillion will need to be invested annually in green infrastructure. It is from such conundrums that the idea of green financing arises.
Green finance is a phenomenon that combines the world of finance and business with environmentally friendly behavior. It could be called a code for facilitating environmental good manners. It is a voluntary act that anyone can take part in whether as an individual, a business, consumer, producer, investor or a financial lender. Green finance is basically an expression of a desire to preserve the environment and is a call on institutions to place greater emphasis on environmental aspects.
How does it work?
Green finance does not have a concrete formula that is peculiar to it. It could be financial incentives like energy tax credits, rebates or reduced fee loans, a demonstration of proactive environmentally friendly behavior, such as promoting the recycling of used goods, use of renewable energy, participating in forestry activities or the avoidance of any business or activity that damages the environment now or for future generations.
Green finance also works through environmental incentives for instance, by positively recognizing entities that are proactive in environmental protection or regulatory flexibility (flexible incentives) that enable market participants and businesses to adopt environmentally friendly technology. For example, funding of climate friendly investments through private equity and venture capital. Venture capitalists or firms, in this case, extend finance to start-up companies for growth. For example, they facilitate emerging technologies in clean energy firms that are expected to produce a greater portion of the world’s clean power in the future.
Financing can also be done through blended finance, green bonds, credit enhancements, emissions trading and securitization. Financial institutions in this case extend lending to individuals, small businesses, or large corporations that run their entities in an environmentally friendly manner. In this type of green finance, loans could be used to promote the proliferation of renewable energy. For instance, a lender could finance the development of a solar power plant, wind power generation plant, a small or major recycling plant.
The above platforms can be catalyzed by institutions and governments playing the ‘mobilizer’ role, in which they create attractive policies and environments that draw various entities towards green financing. For example, the Michigan Department of Environmental Quality provides various incentives like Environmental Audit privilege and Immunity that allows businesses to perform environmental audits and promptly report and correct violations. It also has the Neighborhood Environmental Partners program, a program for clean corporate citizen community groups that gives the participants status and recognition in their community, thus incentivizing the rest of the community to want to identify with them because of the perceived good environmental practices.
Banks and funders, on the other hand, can contribute to and benefit financially from the growing climate related markets. By financing investors, financial institutions enable the emergence and growth of new sustainable markets and opportunities thereby promoting socio economic benefits while minimizing environmental harm.
Does green financing have a chance?
The green finance concept is not yet a globally developed or embraced sector like the finance one, nor does it even have an official relationship with the same. Nonetheless, with green financing, both private and government institutions can set up policies that govern the use of money aligning it with goals of achieving a sustainable environment.
Today, governments and institutions have taken on the challenge whether voluntarily or out of the understanding of the importance to deal with climate change at the earliest opportunity, which is now, to either finance green infrastructure or set up policies. Countries like France now require banks to declare environment-related financial risks, China contributed $3.1billion, and Brazil in 2015 was considering contributing to climate finance as well. Moreover, institutions like the Green Climate Fund committed to disbursing $2.5billion in financing low-carbon projects in 2016.
With the involvement of governments and influential private institutions along with various financial schemes made available by various institutions, there’s a lot of optimism that soon, the financial world will develop a defined legal and implementable relationship with the climate change fight that will elevate the efforts of mitigating and adapting to climate change effects.