Climate Risk & ESG Risk

What is Green Finance and Why is It Important?

Roshni Khatri

22nd Aug'22
What is Green Finance and Why is It Important? | OpenGrowth

The climate change committee has estimated that the UK will have to invest £1.4 trillion between 2020 and 2050 to minimize greenhouse gas emissions such as carbon dioxide. This reflects the significant growth of the green economy and the creation of new jobs while reducing carbon emissions. 

Green financing is vital in working towards net zero to fight against climate change. Since we have recovered from the pandemic, green finance presents an enormous opportunity to build back with a greener future as it also creates businesses and jobs. So in this article we will discuss the aspects of green finance and its significance; stay tuned with us!

 

What is Green Finance?

Green finance is a loan or investment that supports environmentally friendly activity. For instance, purchasing eco-friendly goods and services or creating an eco-friendly and sustainable infrastructure. 

It can be expensive to make the necessary modifications in lifestyles and business. Therefore green financing makes it easier to deal with the cost of switching to electric vehicles or attempting to increase your home's energy efficiency. 

In short, it can help people and entrepreneurs to make good purchasing and investment decisions for both themselves and the environment. Society has fully embraced green finance. We can make an effort to buy or invest in eco-friendly goods and services as it can make it a norm to go for the green alternatives.

Banks are increasingly providing funds to green projects such as wind and solar farms. Moreover, green financing could promote modifications in the country's regulatory framework. 

 

Green Finance

 

Green finance can be broadly defined as any aspect of the financial industry that is related to environmental concerns, initiatives, goals, outcomes, or impacts. In actuality, it is much simpler to recognize the limitations of green finance by digging into current financial products that are designated as "green." For instance, environmental organizations, climate bonds, transition bonds, bonds linked to sustainability, or green equity funds, exchange-traded funds, and asset-backed securities.

Environmental problems like global warming, waste products that are beyond control and the quick depletion of natural resources are only spiraling downwards. So now the question arises of what role green finance can play to make the changes in the environment. And the answer is to prioritize greener investments.

The term “green finance” is more complicated than the traditional term of the fiancé. The awareness of green investment is growing rapidly among many organizations and people. The Climate Bond Initiative recently stated that the issuance of green bonds has raised more than US$ 500 billion in 2021, and is still forecasted that the market will continue to grow to reach US$ 5 trillion by 2025. In recent years, numerous Asian businesses and governments have actively issued green bonds to finance the transition into greener infrastructure and technologies.

 

Green Finance

 

Sustainable Development Goal and Green Financing

The UN has been working with many nations, financial regulators and finance sectors to align the financial systems with the sustainable development goals of 2030. As far as today’s globalized economy is concerned the financial markets are allocating capital to several sectors through the banks and investors. 

The resources invested now have the power to influence tomorrow's ecology, production, and consumption patterns. Green finance focuses on some prime areas such as:

  • Providing support to the public sector in creating enabling environment

  • Promoting the public and private partnerships on financial mechanisms such as green bonds

  • Building community enterprise capacity for microcredit

UN Environment will give countries the service of analyzing their policy and regulatory environment for the financing system and producing roadmaps for sustainable finance through its resource efficiency program.

It also assists the central banks to enhance the domestic financial markets' regulatory environment for promoting multi-national policies at the regional and international levels. In order to link with green economy activities, UN Environment will capitalize on already-existing initiatives including private climate finance and collaborate with decision-makers and private sector leaders.

 

Significance of Green Finance

In 2017, worldwide investment in renewables and energy efficiency fell by 3%, and there is a chance that it will decrease much more. It is because fossil fuels continued to dominate energy investments. This may jeopardize the growth of green energy which is essential for achieving clean air and climate goals, as well as energy security.

So there are no clear boundaries for green finance similar to the concept of finance which has been adopted as the most integral part of economic, consumers, regulators and government’s development in the whole  world. 

There are still some developed and developing economies that support coal energy policies, and the additional CO2 produced by new coal-fired power plants. It can offset any emission reduction made by other nations. 

 

Green Finance

 

Finance is the most integral part of developing infrastructure projects such as energy projects. Financial institutions usually show greater interest in fossil fuel initiatives than in green projects. It is because the new technologies entail several hazards and a reduced rate of return.

If we desire to achieve sustainable development goals then we need to open a separate file for green projects and increase the funding initiatives to provide environmental benefits. This all can be done through the various instruments of green finance such as green bonds, green banks, carbon market instruments, fiscal policy, green central banking and financial technologies. 

 

Conclusion

Green finance covers a wide range of financial products and services that can be divided into banking, investment and insurance products. In other words, we can include water conservation, pollution control, waste reduction and management, biodiversity, habitat protection, afforestation and deforestation in green finance. 

However, there is a long way to go to enable green finance to reach the biggest environmental goals. 

Banks and investors are providing a significant amount of funding to environmentally destructive activities which include the burning of fossil fuels to prevent catastrophic climate change. With this, you should also know about the green future index as it can lead the nations to a low carbon future. Thus by leading on the path of green finance we can preserve nature and natural resources.

 

We, at OpenGrowth, are committed to keeping you updated with the best content on the latest trendy topics from any major field. Also, both your feedback and suggestions are valuable to us. So, do share them in the comment section below.

A keen observer, who loves to spend time with nature. A fun loving person, enjoys to explore the new aspects of life. Passionate about reading and learning new things. Roshni is dedicated towards her work and has worked in different professions.

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