Understanding the concept of Green Finance and its challenges

Despite its environmental and economical advantages, green finance remains a misunderstood concept for many businesses. However, G20 (a congress of the leaders and governments from twenty of the world’s leading economies), has recently voiced their support for several green finance reforms designed to mobilise crucial investments towards achieving an“affordable, reliable, sustainable and low greenhouse gas emissions energy future”; meaning a clearer global understanding of green finance could be on the horizon.

Green finance involves achieving economic growth while increasing sustainability, for example – reducing land, water and air pollution and decreasing levels of greenhouse gas emissions. It also assists with the utilisation of natural resources and the mitigation and adaptation of climate change. Neil Wilson, Markets Analyst at ETX Capital believes: “The transition to a more sustainable global economy will be the most capital intensive movement in history so far”.

Who are the investors?


Typically, green finance is funded through long-term public and private investments (including preparatory and capital costs) from appropriate industries – a bank could improve the greenness of their operations through labelled green bonds / loads to promote the proliferation of renewable energy.

It is unlikely that energy producers who rely on the consumption of fossil fuels will be involved with green finance, for using fossil fuels is a traditional power source that has extremely environmentally negative consequences; in fact, a typical coal plant generates 3.5 million tons of CO2 per year.Therefore, a coal producer would be avoided by a green finance participant, for although green coal produces fewer emissions, it is not considered a green investment.

What challenges is Green Finance facing?


Only a Small Amount of Investors are Classified as Green:

According to G20:

  • Only 5-10% of bank loans are green in the minimal amount of countries where green loans are available.
  • Less than 1% of bond issuance is made up of labelled green bonds.
  • Less than 1% of the holdings by global institutional investors are specific green infrastructure assets.

In several countries, significant investments and stocks of capital that meet the required environmental principles are not explicitly labelled as green; meaning further efforts are essential for altering capital allocation toward green investments throughout the economy. In order to achieve capital reallocation, banks and institutional investors must prioritise environmental risks during their decision-making process.


Young determined businessman with hammer in hands

One of the main challenges faced by green financing is lack of understanding on how to cost-effectively internalise environmental externalities; these can be advantageous for third parties and negative when polluting investments inflict harm. The uncertainty of this has resulted in under-investment for green activities and over-investment in environmentally harmful activities. For example – a water treatment or land remediation project might improve the quality of living for a community and the market value of the residential properties in the region. However, without proper mechanisms to monetise these positive externalities, the project may not yield sufficient return to attract private capital.

Lack of clarity

A lack of understanding with regards to what constitutes green finance has created a huge hurdle for investors, companies and banks seeking to implement green investing. Without having a foundation for internal budgeting, accounting and performance measurements for financial institutions, allocating financial resources for green projects and assets becomes complicated. Also, a lack of understanding might deter the efforts of corporate communications, policy design and environmental risk management.

Article Submitted By Community Writer

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