How Green Finance is Changing the Face of Finance

23rd Jul 2021
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Climate change is changing the finance industry. Previously, banks, corporations and investors would ruthlessly focus on getting the maximum financial return. Now, the focus is on using finance to deliver on sustainability targets.

Don’t believe me? Keep reading!

What is green finance & how does it work?

Green finance, or sustainable finance, is the development and creation of investment, banking and insurance products and services that ensure a better environmental and economical outcome.

It involves making investment and banking decisions that don’t just consider the financial returns and economic growth, but also environmental, sustainability, social and corporate governance factors.

The EU describes green finance as:

Finance to support economic growth while reducing pressures on the environment and taking into account social and [corporate] governance aspects.” – Landscape News

Green finance activity aims to support efforts to reduce climate change, conserve biodiversity, stop inequality, and level out executive remuneration.

How does green finance work?

Due to the widely publicised climate crisis, green finance products and services are already outperforming their traditional equivalents. For instance, globally, the green bond market is likely to be worth $2.36 trillion by 2023.

To meet this increasing demand for green finance and to encourage more ‘green’ projects, banks, corporations, governments and financial institutions are developing new financial products and services such as green bonds, green banks and green funds. And, investors are choosing to finance activities such as renewable energy and sustainable infrastructure.

A variety of loans, debt management structures and investments are being used to encourage the development of green projects or reduce the impact of climate change for other, more regular projects.

Mobilising and accelerating private capital flows into sustainable projects can lead to a range of societal benefits and can provide investors with a way to ensure their capital is contributing to a resilient future.” – The Global City

Why is green finance crucial for the UK and other countries?

It might seem obvious considering the environmental mess we’re in, but green finance does more than just support activities and projects that reverse climate change and help us meet our sustainability targets. 

It’s a way of meeting the needs of environmentalism and capitalism simultaneously.” – WeForum

Prioritising green finance not only helps make sure that green investments are prioritised over other, business-as-usual investments and allows capital to flow into sustainable projects, but it also leads to benefits like ecological infrastructure schemes, the creation of more green jobs and a more sustainable economy.

 Who are the major players in the green finance landscape?

Alongside the banks that provide capital to fund green investments, corporations play a huge part in sustainable finance because they invest in multiple sectors including renewable energy, transportation and infrastructure. Financial institutions also support the growth of green finance by backing sustainable developments through methods such as green bonds. They also play a huge part in influencing global financial governance to give more support to sustainable developments, with national governments providing public funding for green investments and institutional support for them.

The key green finance contributors in the UK

Specifically, in the UK, there are over 90 green equity issuers, which generate at least 50% of their revenue from green activities. 100% of all major UK banks offer green loan programmes and more than 500 UK investors have signed the UN’s “Principles of Responsible Investment”, meaning that the UK has the highest number of firms committed to green principles.

What types of projects does green finance support?

Around $90 trillion worth of investment into green projects is needed by 2030 to achieve our global sustainable development and climate objectives.

For instance, in the UK, the Chancellor of the Exchequer has announced the government has a £15bn budget for green bond issuance, with the proceeds to be spent on environmentally friendly projects.

Green projects that focus on these areas are prime candidates for this type of investment:

  • Renewable energy and energy efficiency
  • Pollution prevention and control
  • Biodiversity conservation
  • Circular economy initiatives
  • Sustainable use of natural resources and land

Alongside green projects, banks such as the Swedish bank ‘’Riksbank’’ for example, have begun dissociating themselves from fossil-fuel-based holdings and selling bonds from some eco-friendly ones instead.

We can contribute to the climate work to some extent by giving consideration to sustainability aspects when investing in the foreign exchange reserves.” - Martin Flodén, Riksbank Deputy Governor

As global warming breaks new records, the pressure is on the financial industry to prioritise green finance and take steps to support green initiatives and objectives. 

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