What is Green Financing And Its Importance and Scope?

In 2022, fear of an ever-worsening climate crisis is making consumers, and big investors, to look for conscious, ‘green’ investment. Green financing has an important role to play in accomplishing net carbon zero and fighting climate change. As we begin to recover from the pandemic, green finance presents a way to build back with a greener future, creating new businesses and opportunities.

What is Green Financing?

It is a way to increase the level of financial flows (from banking, micro-credit, insurance and investment) from the public, private and not-for-profit sectors to sustainable development priorities. A key part of this is to better manage environmental and social risks, choose options that bring a decent rate of return and environmental benefit and deliver greater accountability.

Green finance offers financial tools to active agents to generate activities with positive and durable externalities. Some projects of green finance are the promotion of renewable energies, energy efficiency, water sanitation and environmental audits, and the reduction of transportation and industrial pollution, climate change, deforestation, carbon footprint.

To make green financing successful, multi-stakeholder partnerships must be promoted to include major actors in financial markets, banks, investors, micro-credit entities, insurance companies and public sector.

Why is green finance important?

Green finance is important as it promotes and supports the flow of financial instruments and related services towards the development and implementation of sustainable business models, investments, trade, economic, environmental and social projects and policies. As the financial sector plays a key role through its intermediary functions and risk management in advancing sustainable economic development while directing investment to the real economy, the combination of these two is crucial.

SDGs and green financing

UN Environment has been working with countries, financial regulators and the finance sector to align financial systems to the 2030 sustainable development agenda – to direct financial flows to support the delivery of the Sustainable Development Goals (SDGs). At the core of today’s globalised economy are financial markets through which banks and investors allocate capital to different sectors. The capital allocated today will shape ecosystems and the production and consumption patterns of tomorrow.

The main areas for the current work on green financing are: supporting public sector on creating enabling environment, promoting public-private partnerships on financing mechanisms such as green bonds, and capacity building of community enterprises on micro-credit.

Difference between climate finance and green finance

Climate finance, as discussed in COP26, is a subset of green finance. It refers primarily to public finance, or where developed countries provide financing through a variety of sources, that promotes multilateral efforts to combat climate change. Green finance is a wider term that encompasses all financial flows that support sustainable environmental objectives.

What is green investing?

Green investing seeks to support business practices that have a favourable impact on the natural environment. Often grouped together with socially responsible investing (SRI) or environmental, social, and governance (ESG) criteria, green investments focus on companies or projects committed to the conservation of natural resources, pollution reduction, or other environmentally-conscious business practices. Green investments may fit under the umbrella of SRI, but are more specific.