The transition to a low-carbon economy requires significant investments that can only be financed through deep private sector participation. Incorporating environmental, social and governance (ESG) factors into private investment transforms a risk management strategy into a driver of innovation and new opportunities, delivering long-term value to the company and society. However, capital mobilization for green investments has been limited due to a number of microeconomic obstacles. These include mismatched maturities for long-term green investments. In addition, the typically short-term time horizons of investors also affect capital mobilization. Furthermore, financial and environmental policy approaches are not always integrated.
Most importantly, a standardized definition of “green” and systematization of environmental activities is needed to help investors and financial institutions allocate money efficiently and make informed judgments. To avoid green laundering, the concept of green finance needs to be made clearer.
A unified set of basic criteria for green finance is also needed to move capital flows towards environmental and sustainable initiatives, as well as to monitor and benchmark the market and risks. In addition, green financial assets can benefit from disclosure standards and regulations. Voluntary green finance concepts and standards, complemented by legislative incentives, should be applied and monitored across all asset classes.
Green finance versus sustainable finance
While sustainable finance refers to financial instruments that serve environmental and social goals, green finance is entirely related to environmental goals. According to Bloomberg, in 2018, sustainability and green finance accounted for one-third of all cash flows in tracked assets under management, totaling $30.7 trillion.
The vast majority of emissions emitted by investors are financed either through loans, investments and other financial activities. Financed emissions contribute 700 times more to the carbon footprint of financial institutions than operational emissions. Green finance for investments, loans and credit cards can help reduce emissions.
Green finance in the banking sector
Awareness of what green finance is has helped to increase its relevance in the banking sector. Both commercial and investment banks are beginning to take action in this regard. These actions include incorporating environmental factors into the bank’s strategy and management. It also includes mobilizing capital for specific green assets through lending, credit and savings facilities, and capital market activities such as green bonds. This development is being driven by a variety of efforts around the world, including the Principles for Responsible Banking and the Sustainable Banking Network.
Multilateral Development Banks (MDBs) also play an important role in mobilizing international climate finance and increasing financial leverage for low-carbon and climate-resilient projects. They are doing so by strengthening public and private investment planning, preparation, structure, financing, and risk mitigation. Many have boldly pledged to ensure that their loan portfolios support conservation efforts and that natural capital and social impacts are considered in investment decision-making processes.