Green finance refers to a heterogeneous group of investments and lendings aimed at promoting sustainable development and initiatives, environmental products as well as policies that encourage the development of a more sustainable economy. However, it is not just about climate impact. One thing is certain, however: the institutions are accelerating because they are convinced that sustainable economic development depends on it.
What is a sustainable investment? From a financial point of view, it is an investment commensurate with the capacity of the investor. Thematically, it includes everything that minimises environmental impact and waste of resources. This is the heart of green finance.
Moreover, green finance strives to achieve other environmental goals such as industrial pollution control, biodiversity protection and water sanitation. The main instrument employed are green bonds. A green bond is a fixed-income bond whose earnings are spent to benefit environmental projects.
This branch is often erroneously confused with green investment. The latter is a subset of green finance and it refers to products and projects directly bound to the environment. Besides, green finance deals with operational costs of green investments, such as project preparation and land acquisition costs, which do not apply to green investments. Beyond financing green investments, green finance also is concerned with financing of public green policies and green financial system.
In the context of the banking system, this kind of finance may be defined as the set of services and products that – among other factors – take into account the environmental impact when granting credits. Their goal is to grant sustainable credits both from a financial and environmental point of view.
Investors started taking a serious interest in green finance following The 2015 Paris Agreement, which was ratified by 169 countries. The Paris Agreement has the long-term aim of keeping the rise in global average temperature to well below 2°C above pre-industrial levels. The countries which ratified this agreement have also to limit the increase in global average temperature to 1.5°C to lower the effects of climate change.
Green growth boosts economic growth, therefore, investing in economies with net-zero greenhouse gas emissions is of the utmost importance considering that the global population is growing. Investing in green finance could increase the G20 economies by 4.6% per year.
Social motives play also an important role in investors’ decision to invest their money in this branch. In 2019 Baby-boomers have been outnumbered by Millennials. The society this young generation imagines and wants to live in is green and socially conscientious. Therefore, it is only natural for investments to reflect their environmental and social values.