After years of volatility, green finance is emerging as a central part of our efforts to address climate change and transform our energy infrastructure. Green finance is primarily concerned with adapting to the impacts of climate change and reducing greenhouse gas emissions. It is how we can stream tremendous amounts of needed capital into emissions-free sources of power.
Although a precise definition of green finance (GF) is somewhat elusive, it can generally be understood as sustainable investment and banking, where investment and lending decisions are made based on environmental considerations. This applies to both the public and the private sector, and it specifically entails environmental screening and sustainability-focused risk assessment.
Economic Opportunity in Green Finance
For years, GF was dismissed as being too risky. Now, in the wake of the signing of the Paris climate accord, lenders cannot ignore the economics of climate action that make clean energy an attractive opportunity. Governments began seriously investing in clean technologies in 2005. However, the early years were fraught with challenges, not the least of which was the economic crisis of 2007 – 2008. Nonetheless, between 2005 and 2010, there was a 200 percent increase in the growth of GF.
There is well-warranted optimism that 2016 will be the year in which green finance comes of age. Governments, businesses, and global organizations are all getting on board to make this a landmark year for GF.
In an article published in the Huffington Post, Nick Robins, the Co-Director of the UNEP Inquiry into a Sustainable Financial System, said:
“From a strategic perspective, 2015 built a new set of policy foundations for the global economy, signaling new directions for the financial system…So, if 2015 designed the foundations, the task for the financial community in 2016 is to take the practical steps to deliver the reallocation in capital that’s required, and do this in ways that result in an orderly transition in global markets.”
Green Finance Fuels Climate Action
At a G7 meeting last summer, the world’s leading economies agreed to phase out fossil fuels. At this meeting, Angela Merkel stated that the leading industrialized countries were committed to raising $100 billion in annual climate financing by 2020 from both public and private sources.
A new report, titled “Mapping the Gap: The Road From Paris,” states that green finance has the potential to deliver decisive climate action. According to the report, GF is capable of keeping temperatures from rising beyond the upper threshold limits of 1.5 to 2 degrees Celsius set in the Paris Climate Accord. Produced by a partnership between Bloomberg New Energy Finance, Ceres, and Ken Locklin of Impax Asset Management, the report suggests that there is sufficient capital in the global economy to finance the transition to clean energy sources.
We have gleaned valuable insights into the feasibility of GF from several pilot projects. A report from the Climate Investment Fund (CIF) shows that green finance works. The report “Learning by Doing: The CIF’s Contribution to Climate Finance” studied GF in 48 countries. CIF oversees more than $8 billion, which it uses to support projects in cleantech, forests, climate resilience, and renewable energy.
We now have a wide range of initiatives and organizations that are supporting the growth of GF, including the SDGs and the green bond market. This year, the Green Climate Fund has come of age, and the G20 has indicated that it is committed to green finance. Mark Carney, the Governor of the Bank of England and Chairman of the Financial Stability Board, has said that GF has grown up and it is no longer a “niche”. In March, Carney said that in a bid to mainstream climate-friendly funds, the G20 will make green finance a “priority”. The G20 has explored the concept through its Green Finance Study Group.
The IMF is now focusing on climate change, and the World Bank, along with the IBD, are contributing to the funding of clean energy in the developing world.
Global Consensus
Many governments are gearing up to get involved with GF. Some nations have already implemented policies. As reported by Bloomberg, Indonesia plans to limit banks’ ability to lend money to projects deemed environmentally destructive. While this is a move designed to curb slash-and-burn agricultural practices in the country, it can be applied to any set of environmental parameters. A May 2015 WWF report stated that four major banks in Indonesia, Malaysia, and Singapore have embedded environmental factors into their credit-decision processes. Last fall, the Association of Banks in Singapore introduced guidelines on responsible financing.
The 2016 UNEP report “The Financial System We Need” declares that the UK is a global hub for GF. London’s financial community is positioning itself to lead green finance, while Hong Kong and Singapore are already leaders in GF.
As explained by Achim Steiner, Executive Director of the United Nations Environment, “2016 is set to be the year of green finance. Across the world, we are seeing a growing number of countries aligning their financial systems with the sustainability imperative.”
Governments, financial institutions, investors, and businesses have been pouring capital into clean energy at ever-increasing rates. After a protracted period of intense volatility, green finance has finally arrived. It is now an unstoppable global force that is helping to build a clean power infrastructure.
