Climate change is a myth for many politicians globally. However, consumers and investors are increasingly becoming aware of it. This is why green finance and green projects have increased exponentially over recent years.
Traditional financial instruments fund development activities offering huge returns and economic growth. The issue: these returns come at the cost of the environment.
And the result? Catastrophes. Floods, forest fires, highly infectious diseases, and earthquakes. We are seeing increased water, land and air pollution, high mortality, loss of livelihoods, increased inequalities.
For instance, the COVID-19 pandemic that we are in the middle of currently is also rooted in climate change. The impact of such disasters is not limited to a species or a section of people. For instance, COVID-19 has led to deaths, job losses, economic crashes, affected education, disrupted supply chains, business closures and killing of animals.
Why Green Finance Over Traditional Finance?
The need for sustainable development has become a necessity. And, it is essential to fix environmental degradation and social inequalities that have considerably increased over the years.
The World Economic Forum has put together the Global Risks Report 2021 to highlight the biggest risks threatening Earth in 2021.
Quite unsurprisingly, the report puts the following as the top five risks, by likelihood:
- Extreme weather,
- Climate action failure,
- Human environmental damage,
- Infectious diseases and
- Biodiversity risks
We talk about climate change day in and day out, but how do we tackle it?
To begin with, we, humans, need to make conscious changes to our lifestyles. That means, less dependency on private transport, more recycling and reusing, and changing our consumption patterns. For instance, avoiding single-use plastics, reducing overdependency on meat and meat products, and ensuring we don’t waste food, water and electricity.
Not easy, and not enough either.
Secondly, our industries, corporates, government, and educational institutions need to work together. This will help create a chain reaction model of small impactful actions brought about by the conscious changes we make in our daily activities, decisions, and lifestyles.
Thirdly, our economic activities like manufacturing, construction, farming, fishing, and transportation should not take a toll on the environment. This can be done by managing emissions and waste generated from these activities.
Funding activities that focus on solving environmental problems should come from both private and public sectors alike.
What is Green Finance?
Green Finance is a financial activity that creates an inflow of funds into activities tackling environmental issues. This means it engages traditional capital markets to create and distribute financial products and services. These are then used to fund environmental projects and yield investable returns.
Green financing is done through a slew of measures like loans, debt funds and investments. For instance, green bonds, sustainability bonds, social bonds, sustainability-linked loans and green loans.
As per the Global Sustainable Investment Alliance Report of 2018, sustainable investments stood at $30.7 trillion for countries like USA, Japan, New Zealand, Australia, Canada and Europe. All the regions, except for Europe, showed an increase in sustainable investing.
Where Can Green Finance Funding Be Used?
Green financing can be used to fund activities like:
- Renewable energy production and improved energy-efficiency projects
- Preventing and controlling pollution
- Controlling emissions
- Nature conservation
- Circular economy – making stronger Reduce, Reuse, Recycle frameworks
- Sustainable agricultural practices
- Sustainable use of natural resources like land and water
Why is Green Finance Needed?
Until now, public and private sectors have mostly aimed at profits. This was being done without giving a thought about the impact of our activities on the environment. However, now there is increasing awareness. All development should happen in tandem with ecological conservation and not at a cost of it.
It is essential that the private, not-for-profits and public sectors work towards sustainable development goals (SDGs). But to fund SDGs, international financial systems also have to align themselves to these goals. This can bring in more investments into green projects.
Traditionally, financial institutions have always shown more interest in funding projects like fossil fuel that offer high ROI. However, keeping the long-term impacts of such projects in mind and the necessity to achieve the SDGs, it is essential to scale up green financing.
Funding projects that tackle environmental and social problems is important for a sustainable, healthier, and equal world for all.
Green Finance is a way to work towards achieving these.