Building a more sustainable future with green finance

As the world’s attention turns to tackling the climate crisis and making the overdue, critical shift to carbon net-zero, awareness of sustainability initiatives – and the role that financial markets and financial products have to play – has been thrown into the spotlight.

Underpinning both the viability and widespread rollout of many of these initiatives is the demand for a redesigned, sustainable financial system. Such a system is required to create, value and transact financial assets in ways that shape wealth in order to meet the future, long-term needs of an environmentally sustainable, inclusive global economy.

This is detailed in the United Nations Global Compact roadmap, which estimates that the world needs to spend between $3 trillion and $5 trillion annually to meet the Sustainable Development Goals (SDGs) by 2030. Central banks, financial regulators and other stakeholders have recognised the critical impact that prudential policies and climate finance can have in meeting this target, and have started introducing this into their international standards.

But what does green finance look like in practice, and what are its applications?

What is green finance?

Lloyds Banking Group define green financing as a loan or investment that supports environmentally friendly activity, such as purchasing environmentally friendly goods and services, or building environmentally friendly infrastructure. This type of financing encompasses any financial instruments whose proceeds are channelled towards environmentally rooted goals – ultimately, goals that are low-carbon, sustainable and inclusive.

It can be understandably costly to switch to greener ways of living and working, for individuals and businesses. Green finance aims to bridge this gap, offering incentives that make it easier and cheaper to make greener lifestyle choices – such as improving the energy efficiency of our homes or switching to electric vehicles.

The financial sector has taken notice. Increasingly, more banks and financial institutions are making green finance available and accessible. As such, they play a pivotal role in the future of sustainable finance and the scale and scope of what green initiatives can achieve. Common types of green finance include:

• green loans
• sustainability-linked loans
• ESG derivatives
• green bonds
• green investment funds
• green mutual funds
• solar bonds
• green mortgages
• sustainability-linked bonds
• renewable energy credits
• climate risk insurance
• sustainable securitisations.

The Alliance for Financial Inclusion (AFI) has priority areas in which to drive its work with inclusive green finance, known as the Four Ps:

• Promotion – Prepare the private sector to offer financial services that address climate change.
• Provision – Provide financial resources for green projects and activities to qualified beneficiaries.
• Protection – Socialise climate risk and associated potential losses through risk-sharing mechanisms.
• Prevention – Avoid undesirable outcomes by lowering social and environmental risk.

Promotion is the introductory phase of its approach, with the following three making up the implementation phases that aim to provide intervention that directs funds towards climate-resilience building action.

What are some examples of green financing?

The Taskforce on Climate-Related Financial Disclosures (TCFD) offers a framework for organisations to publicly disclose both climate-related opportunities and risks associated with their businesses.

The UK was the first of the G20 countries to make TCFD-aligned disclosures mandatory across the economy, and seeks to nurture innovations for the climate challenge – such as the development of a credible, voluntary carbon market. There are numerous further examples of green financing endeavours worldwide. For example, funding that supports:

• environmental audits
• agricultural research and development
• switching from use of fossil fuels to renewable energy sources, such as solar power, hydroelectricity and wind
• lowering pollution levels
• reducing carbon footprints
• climate-proofing buildings and infrastructure
• combating deforestation
• land-use planning
• nature-based solutions to protect people and assets.

What are the benefits and challenges of green financing?

Reuters report that global green financing, aimed at environmentally friendly projects around the world, has grown over 100 times in the past decade: global borrowing – by issuing green bonds, green loans and equity funding through initial public offerings focusing on green projects – surged to $540.6 billion in 2021, from $5.2 billion in 2012.

Green finance presents an opportunity to design a greener future – one featuring innovative, new businesses, more jobs and a stronger, more sustainable economy, that simultaneously works to reduce carbon emissions. And, building back after the pandemic offers the ideal catalyst for this transformation. By promoting and encouraging green finance – on a grand scale – environmental initiatives may receive priority over less sustainable business investments, further tipping the balance in favour of a greener future.

By design, green efforts forge the path for a better world, featuring greater quality of life and facilities for humans. Naturally, sustainable developments that do not destroy the environment champion the preservation of our natural world and its biodiversity.

However, green finance is not without its challenges. Issues may be encountered when investors have short-term perspectives that are not in sync with the far-reaching, longer-term view offered by green investments. It can also be difficult to balance, coordinate and cooperate between financial and environmental objectives, as each has their own objectives and priorities.

What is the difference between green financing and sustainable financing?

Whereas green finance is concerned with sourcing funding to address issues of a climate and environmental nature, as well as improving the financial risk management of these issues, sustainable finance is an evolution and extension of this. 

Sustainable finance is concerned with environmental, social and governance (ESG) issues and risks. It aims to increase the long-term investments made regarding sustainable economic projects, activities and initiatives.

Champion a low-carbon economy through green finance initiatives

Are you passionate about helping to reverse climate change through your work? Want to leverage climate finance and sustainable finance in support of ESG-based goals?

Develop the skills and expertise to lead the way in sustainable finance – as well as wider social, environmental and global concerns – with Keele University’s online MSc Management with Sustainability programme.

Designed for those pursuing senior leadership positions, our flexible programme offers a comprehensive, critical understanding of conducting ethical, responsible and sustainable business. You’ll gain insight into the realities of leadership in an interconnected, ever-evolving global landscape, becoming adept at high-level decision-making and sustainable investment decisions. Study topics from organisational operations, risk management and green finance strategy, to people management, leadership, marketing and more.