What is Green Finance?
Across the globe, countries, organizations, businesses, and investors are actively reshaping their systems and frameworks to adapt to the risks associated with climate change. In this context, green finance plays a crucial role in addressing investment and funding challenges within the realm of sustainable development, while facilitating the acceleration of the transition towards a greener economy.
Green finance can be defined as the practice of prioritizing environmental considerations in investment decisions and financing sustainable development programs. In essence, green finance aims to guide capital and financial flows toward economic development initiatives that safeguard the environment. This encompasses the provision of financial resources for projects aimed at preventing pollution (such as air and water pollution), mitigating climate change, conserving biodiversity, and preserving water systems.
An integral part of green finance involves effectively managing environmental and social risks, capitalizing on opportunities that offer both a satisfactory return on investment and environmental benefits, and ensuring greater accountability.
Green Finance’s three major functions:
- Resource allocation: By means of monetary policy, credit policy, regulatory policy, mandatory disclosure, green evaluation, industry self-discipline, product innovation, etc., the aim is to guide and leverage financial resources towards low-carbon projects, green transformation projects, and green innovative projects such as carbon capture and storage.
- Risk management: the risk mitigation role of financial instruments such as insurance and derivatives are utilized to prevent climate and environmental risks. Tools such as climate risk stress testing, environmental and climate risk analysis, and adjustments to risk weights for green and brown assets are employed to enhance the financial system’s ability to manage climate change-related risks.
- Market pricing: In order to guide funds towards the green and low-carbon sectors through differential interest rates, countries are establishing national carbon emissions trading markets and developing derivative products such as carbon bonds to provide reasonable pricing for emissions reduction through trading.
Instruments of Green Finance:
- Green bonds: capital is raised on public markets in the form of bonds and the proceeds are earmarked for funding climate and environmental projects;
- Sustainability-linked loans: the interest rate of the loan is linked to the ESG performance of the borrower;
- Green loans: capital is given between the lender and the borrower without a public market;
- Green insurance – which covers economic compensation liabilities caused by environmental accidents. Mandatory insurance can increase returns and lower risks on green finance.