Green finance is very simple in practice; a financial activity (product or service) that ensures a better environmental outcome. It is proving to be an effective way to meet the growing needs of both environmentalism and capitalism. It can take many forms, but broadly its divided into banking, investment and insurance products which ensure sustainable development.
Why is it important?
Climate change is an ever more pressing issue and gaining consensus in how to solve it is proving challenging. Commentators have high hopes for green finance in helping to facilitate meaningful change. The UN is working to align international financial systems to its own sustainable development agenda, believing it plays a vital role in delivering its goals.
Green finance can incentivise sustainable innovation, green projects such as carbon capture technology have had considerable backing which has only bolstered is growing success, bringing more people and more money into the industry. This approach aims to have a trickle-down effect, and we could expect to see changes for the better across all areas of our lives, from high tech energy solutions to how we get to work each day.
The effectiveness of focusing on an industry in such a fashion is ironically displayed perfectly by fossil fuels. Subsidies for fossil fuel production have been used to facilitate cheap energy with the aim to stimulate economic growth. The US is a particular expert in this field, having been written into their tax code. The International Monetary Fund (IMF) found that in 2017 fossil fuels received over $5.2 trillion in subsidies. Perhaps here lies the problem, it is no secret that where the money goes, people go. Proper and effective incentives drive production exponentially and focusing this on sustainability could prove invaluable.
What steps are the UK taking?
As a global financial hub, it is important for the UK to be a leader in this field, they need a post-Brexit approach, or they risk falling behind. Chancellor of the Exchequer, Rishi Sunak recently announced a series of new measures aimed at making the UK a world leader in the green finance sector. The UK will be the first country have a task force on climate related disclosures (TCFD). The task force provides a means for companies to better provide information to investors, insurers, stakeholders etc. on climate-related financial risks. It also aims to help investors understand their exposure to climate risks. The task force will enforce these measures and they will be fully mandatory by 2025.
A ‘green taxonomy’ has also been proposed as a framework to determine which activities are environmentally sustainable. It provides an understanding of the impact a firms’ activities and investments have on the environment and aims to drive a sustainable economy by highlighting climate risks.
Growing international interest
Despite the UK aiming to be a world leader, the US, China and France are the largest holders of Green bonds. The European central Bank hold around 20% of the Euro-dominant green debt. Both signals that this is an area set for increasing growth. Whether this is being done for the good of the world or for economic gains is neither here nor there. This is where green finance comes into its own, it satisfies those who are only concerned about the economy and making money and those with real interest in sustainability and tackling climate change. The City of London Corporation is hosting the Green Horizon Summit, looking at the role green finance can play in the economic recovery after Covid-19. The main goal is to find a way for public and private finance to aid a sustainable future. With the election of Joe Biden as US president, we can expect to see the US re-join the Paris Agreement and a greater commitment to green finance. Having the world’s largest economy back on board is major coup for a sustainable future.
It is important to remain realistic, the International Energy Agency predicts that coal will still hold a 30% share of global energy consumption in 2040 despite any efforts to halt its consumption. Positive steps but fossil fuels are not going away.