The transition to a “decarbonized” economy will require an unprecedented level of new capital investment, especially in the form of green finance, to support measures to reduce greenhouse gas emissions and help corporations adapt to the impacts of climate change.
Climate change has become a defining political and economic issue and is likely to remain so for many years to come. Around the world, governments, investors, corporations, and ordinary citizens are beginning to take action in response to the climate crisis, with a particular focus on decarbonization strategies. The transition to a “decarbonized” economy will require an unprecedented level of new capital investment, especially in the form of green finance to support greenhouse gas emission reduction activities and help corporations adapt to the impacts of climate change.
While estimates of the financing needs vary, they all run into the trillions. According to the G20, global investment of $90 trillion is needed over the next 15 years to achieve global sustainable development and climate change goals. According to the International Energy Agency, a total investment of USD 53 trillion is needed by 2035 in the energy sector alone. In addition, it has become clear that a combination of public and private sector capital will be needed to ensure the transition to a decarbonized future, as public funds alone cannot cover these costs.
Therefore, there is an urgent need to strengthen the ability of the financial system to mobilize private capital for green investments in sustainable development. This, in turn, requires the development of new financing instruments to match potential investors with green financing needs and facilitate the mobilization of capital in the required amounts.
Existing green products
“Green bonds
“Green bonds have become a priority investment attraction tool for the private and public sectors to finance projects with environmental benefits. In particular, low-carbon transportation, clean energy, and energy-efficient buildings have already been financed. At the same time, there is a lot of discussion around issues such as greenwashing and whether green bonds are better than conventional bonds. It has now become a widely recognized asset class that attracts ever-increasing amounts of institutional capital and is likely to become the foundation of the green finance revolution.
Green mutual funds
A green mutual fund is a structured investment vehicle that selects investments based on a green investment strategy. This structure allows different investors to pool their capital, with qualified investment managers following an agreed investment strategy. This type of investment structure has been widely used to support renewable energy investments over the past 15 years and is now a widely recognized investment vehicle.
New green products
As in any developed capital market, it is crucial that a more diverse range of financial products is required. Below we briefly describe some new green financial products:
“Green securitization
Pooling green loans and issuing securities backed by them can unlock additional capital to finance the transition to a decarbonized and climate-resilient economy. Securitization allows for the pooling of small loans and helps to attract a different investor base. Importantly, securitization of existing loans also provides banks and other primary lenders with the opportunity to refinance existing loan portfolios and reuse capital to create new green loan portfolios. Various structures can be used, such as loan-backed bonds and asset-backed securities transactions.
“Green leasing/rental
Leasing is one of the oldest and most popular financing structures available to finance the purchase of equipment, but is still in its infancy when considering the potential for financing green assets. Areas in which green leasing has been used include:
- Lease of green (environmentally friendly) housing
- Lease of a green (environmentally friendly) car
- Energy efficiency
- “Green mortgage loans