Corporate Finance

Green Finance and the Sustainable Economy

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Definition and demand

Arriving at a definition of green finance is an essential but difficult enterprise. So far, we do not have a precise and commonly accepted definition of just what green finance is. According to the German Development Institute, green finance is generally made up of three parts: the green financial system that deals specifically with green investment, the financing of green investment and, finally, the financing of green public policies.

 

There is huge demand for green finance and it is a long way from being met. According to the Global Environment Facility, an estimated $400-600 billion per annum is needed to finance the conservation of land, forests and water, and more than $350 billion of incremental capital to fund projects in renewable energy and energy efficiency.

 

2016 – The best year ever

In 2016 the G20 heads of state for the first time recognized the need to scaleup green finance, setting out a series of steps to make this happen. Key countries issued strategies for making their financial systems greener, and UN Environment estimates that the number of policy measures to green the financial system has more than doubled to over 200 across 60 countries.

 

Importantly, these policy moves were closely connected to the rapid growth of green finance in the marketplace. The green-bonds market went from strength to strength in 2016 with over $81 billion in issuance, almost double 2015’s $42.2 billion (Source: Climate Bonds Initiative). Financial centers from Casablanca to London, Hong Kong to Paris set out their plans to seize the green finance opportunity, notably by mobilizing the capital required for the low-carbon transition. The transformational potential of fintech for sustainable development has begun to be appreciated, from crowdfunding and mobile payments to AI.

 

What’s next?

With the Paris climate change agreement now in force, the focus in 2017 has shifted to how the nationally determined contributions that set out each country’s goals can be turned into clear investment pipelines. For one thing, the public and private sectors need to work together to facilitate the flow of capital. On top of that, the interaction of fintech and green finance needs to develop further. Ant Financial Services Group and UN Environment launched a new international partnership during the World Economic Forum Annual Meeting in Davos. The Green Digital Finance Alliance will bring together financial institutions committed to using digital technology to advance green finance in lending, investment and insurance. These new financial services can reduce the cost of payment and provide better access to capital domestically and internationally.

 

Green finance is on the way, but another point needs to be considered, we need to strike the balance between the “green” and development. As Marilyn Ceci, managing director and head of green bonds at JPMorgan notes, “the definition of green finance should not be too strict to crush the growing and developing economy.”

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