The Significance of Green Financing

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The Significance of Green Financing | Future Buesiness

What is Green Financing?

Green financing is a loan or investment that supports environmentally-friendly activity, such as purchasing environmentally-friendly goods and services or building environmentally-friendly infrastructure.

Making the necessary lifestyle and business changes to become greener can be expensive, so green financing can often include incentives that make it easier to deal with the cost of switching to electric vehicles or improving the energy efficiency of your home, for example. So it can help people and businesses make good purchasing and investment decisions for both themselves and the environment. 

Green finance has become a mainstream concern. As risks associated with environmentally-damaging products and services increase, over time we can expect purchasing and investing in green alternatives to become the norm.

According to Lloyd’s, banks are increasingly making more green finance available and accessible to fund green projects such as wind and solar farms, and to invest in businesses themselves to help them become greener. Banks therefore play an essential role in helping people and businesses to access the money to support environmentally-friendly activity.

The importance of green financing in supporting the transition to a low carbon economy was recognised by COP26 in Glasgow, a UN conference convening 190 world leaders to agree plans to protect the planet.  It followed on from COP21 in Paris in 2015, where governments agreed to limit global warming to well below 2 degrees Celsius – preferably to 1.5 degrees – compared to pre-industrial levels. 

Examples of Green Financing

According to the Impact Investor, socially responsible banks and other investors are finding ways to place equity and debt into investment opportunities that incorporate core ESG (Environmental, Social, and corporate Governance) principles while also helping people and businesses reach their sustainable development goals.

1) Privately Placed Green Bonds

A green bond is a form of investment that lets a business owner borrow money from private investors using a bond secured against their house. The investor could make back on their investment depending on risk, collateral, and stability of the underlying assets. 

2) Renewable and Sustainable Equity

This type of financing is for homeowners and businesses. The most common example is solar power. By setting up solar panels on your home, you can receive tax credits or cash payments in return for the power generated by your solar panels. The benefit of this option is that it is stable and guaranteed over a 20-year timescale.

The financing that you receive will likely go to the capital costs associated with installing the solar panels.

3) Green Mutual Funds

This type of green finance is similar to regular mutual funds, but it invests in companies that provide goods and services that are environmentally friendly.

Conventional mutual funds do not necessarily consider the environment when they make investment decisions, which means green investments are growing in popularity.

Challenges Facing Green Financing 

The London Institute of banking and finance says that many of the other challenges of green finance are those that have dogged the industry for many years, such as how to:

  • Finance small to medium enterprises (SMEs), infrastructure projects, and projects which produce social returns but insufficient private returns to be investable. 
  • Fund public investment when there are so many competing needs. 
  • Address the many frictions and inefficiencies which, on close inspection, abound in supposedly efficient financial markets.

They continue, adding that the biggest challenge lies not with insufficient supply of green finance but with insufficient demand. There is a shortage of green assets. The only significant ‘green asset class’ currently is green bonds. These are usually oversubscribed and often increased in size during syndication. 

They argue that the underlying problem is that big investors, in particular, cannot get their hands on enough to satisfy the demand for new green funds. 

For the biggest businesses, clarity is an issue. According to the Guardian in 2021, “the thinktank Carbon Tracker recently found that 70% of companies and 80% of auditors failed to disclose climate risk in their financial reports.”

The Guardian continues, saying that Shell advertises its “target to become a net zero emissions” company by 2050, publishes a “sustainability report” and partners with environmental organisations around the world. Yet little of this environmental awareness shows up in the hard numbers.

The company’s latest accounts features this disclaimer: “Shell’s operating plans, outlooks, budgets and pricing assumptions do not reflect our net zero emissions target.” In other words: whatever the oil giant says is not what it thinks. The multinational is openly admitting that its core assumptions have not changed to reflect the greatest single threat to our planet, our economy – and its business model. 

There are also complications regarding the definition. Shameela Soobramoney, Chief Sustainability Officer of the Johannesburg Stock Exchange, says: “Green unfortunately does not have the uniform kind of a definition across jurisdictions.”

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Impacts on Businesses and Society 

Put simply, green finance has the potential to provide environmental and economic benefits for everyone. However, it needs to be effectively and properly managed in order to ensure that there is a just transition to a low carbon society. 

In society, green financing expands the amount of businesses and individuals who are able to gain access to environmentally-friendly goods and services, especially for the marginalised and vulnerable. This makes a low carbon society an equal one, and can foster socially inclusive growth. 

With green financing, more money is invested in businesses with the express aim of helping them become greener. This can help businesses to grow, create jobs, reduce carbon emissions and stimulate the economy. This is called a ‘great green multiplier’, where both the environment and the economy benefit continuously. 

SEE BELOW: Interview with Shameela Soobramoney, Chief Sustainability Officer of the Johannesburg Stock Exchange

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