Green Finance Explained

What is Green Finance? And Why is it Important?

Green finance has taken off in recent years, from being a niche part of the economy to playing a more prominent role. From 2012 to 2021, global green financing grew more than 100x from $5.4 billion to $540 billion. This growth is in part due to the increased recognition of the multiple environmental crises, specifically, the climate crisis.

The International Energy Agency estimated that the world needs to invest $53 trillion cumulatively by 2035  in energy supply and energy efficiencies to put the world on a path to keeping global temperatures below 2.0C. Another study estimated that climate finance must increase to $4.35 trillion by 2030 to meet climate objectives. These studies and others like them suggest that green finance is needed on a massive scale to prevent the worst effects of climate change and environmental degradation.  

Benefits of Green Finance

A global transition to a low-carbon economy will require massive investments. With Green finance, investors earmark their investments to activities designed to reduce emissions and mitigate climate change. Investors who use green finance may also reduce their investment risks as investments in higher carbon-intensive businesses increasingly carry transition risks.

Green financing may also support the growth of new green business opportunities, jobs, and skills and help companies and governments meet ambitious climate targets.

The benefits of green finance go beyond the environment and may also offer in some cases, better financial performance than “vanilla finance.” Green auto loans, mortgages, and credit cards offer preferential rates.

Types of Green Financing

Green financing comes in many shapes and forms. Green loans, green mortgages, green bonds, and other green financial products and services are all ways of flowing finance to contribute to environmental causes. The list below is a snapshot of just some of the many types of green financing and examples of them in action.

• Green Mortgages - With green mortgages, lenders can offer better terms to home buyers for houses that have a high environmental sustainability rating or if the buyer commits to investing in improving the environmental performance of a home. UK bank Natwest offers borrowers reduced interest rates on homes with an Energy Performance Certificate rating of A and B.
• Green Loans  - Green loans are loans that fund environmental projects such as domestic solar panels, electric cars, energy efficiency projects, and much more. Green auto loans typically offer lower interest rates and longer repayment periods for electric or fuel-efficient cars.
• Green Credit Cards - Green credit cards such as Aspirations’ Zero card plant a tree every time users make a purchase. They allow consumers to use their spending toward green financing to positively affect the environment.
• Green Banks - Green banks work much like normal banks, but they use public money to drive private investments into clean energy and other green projects. A 2020 study, found that the number of green banks in America grew from 1 to 21 from 2011-2020 and have invested $7 billion into clean energy in that time.
• Green Bonds - Green bonds make up the vast majority of green financing. They include investments in bonds, the proceeds of which are used to fund a host of green projects, including renewable energy, clean transportation, conservation, and more. In 2021, Iberdrola, the multi-national renewable energy company, issued the largest green bond in history, worth €2 billion, to fund offshore wind farm projects.  

What are Green Bonds?

Green bonds are a type of bond issued by corporations or governments with the commitment that the proceeds will be used for green projects. The two primary types of green bonds are “use of proceeds bonds,” which earmark the proceeds of the bonds for green projects such as energy efficiencies or animal conservation, and a project bond, which ring-fences proceeds for specific projects such as a wind farm.

The World Bank created the first green bond in 2008 at the behest of a group of Swedish pension funds that wanted to invest in projects that mitigated climate change. Since then, green bonds have become a key part of green finance, making up 93.1% of the green finance market between 2012 and 2021.

Green Finance vs. Sustainable Finance

Green finance is a subset of sustainable finance. Sustainable finance encompasses financing instruments that support environmental and social objectives. Green finance is solely focused on environmental goals. Bloomberg estimates that sustainability and green financing were responsible for a third of all money flows in tracked assets under management in 2018, representing $30.7 trillion.

For investors, the vast majority of their emissions come from their financed emissions or emissions from loans, investments, and other financial services. Financed emissions contribute, on average, 700x more to financial institutions' carbon footprint than operational emissions. Using green financing for investing, loans, and credit cards can help reduce these emissions.

Measure and Manage Your Financed Emissions

Measuring and managing the emissions of financial products and services is now a key part of transitioning to a low-carbon economy. However, the vast majority of financial institutions (75%) that report their emissions to the CDP are not reporting their financed emissions. Persefoni can help financial institutions take those first steps in measuring and managing their climate impacts.