Green Finance: The Financial Revolution Earth Needs

It would be appropriate to say that industrialisation was the driving force behind the start of climate change. The world order that exists today is largely capitalistic that generates and survives on ‘surplus’-surplus goods, surplus wealth. This is antithetic to the values of sustainability and theenvironment. We have set grand goals for our planet. SDGs by 2030. Net zero by 2070. But how on earth are we to achieve them without a sustainable financial support system? Green Finance is sort of midway between the two-ensure profit while benefiting the environment.

Industrialization brought prosperity to nations and uplifted countless lives, but it also exacted a heavy toll on the environment. Fossil fuels powered the factories that fueled the economy, spewing emissions into the atmosphere, leading to global warming, and the grim consequences we face today. The realization that we cannot continue on this trajectory has given birth to a paradigm shift, where sustainability is no longer an option but a necessity.

Green Finance is not merely a new buzzword; it’s a transformative approach to finance that holds the promise of a greener, more sustainable world. But how does it work? At its core, Green Finance is all about aligning financial activities with environmental, social, and governance (ESG) criteria. It’s a compass pointing investors and financial institutions toward projects and initiatives that are eco-friendly, socially responsible, and transparently governed. They are alternatives to conventional forms of funding. Investments in companies and technologies that promote environmentally positive activities and products while eschewing problematic sectors of the economy like fossil fuels.

WHY DO WE NEED GREEN FINANCE?

One might wonder why we don’t solely rely on grants for sustainable projects, much like other socially relevant initiatives. Grants from governments and philanthropic organizations undoubtedly play a crucial role. However, they fall short when it comes to reversing, or at the very least halting, the environmental damage caused by carbon emissions. An estimated $400- 600 billion per annum is needed to finance conservation of land, forests and water, and more than $350 billion of incremental capital – to fund projects in renewable energy and energy efficiency, according to the World Bank. And less than 15 per cent of the necessary money is allocated to conservation, with the majority of funding coming from charitable and public sources.

To achieve this monumental task without jeopardizing the tremendous progress we’ve made over the last century and a half, we must fundamentally transform the financial ecosystem within which businesses operate.

WHAT ARE GREEN BONDS?

One of the many instruments of Green Finance is Green Bond. Green bond is a debt security that is issued to raise capital to finance climate related or environmental projects. These are like regular bonds, but the funds raised are earmarked for environmentally friendly projects. Now, a bond in general is a debt instrument which is a fixed amount given by an investor (individual) to a corporation or government (borrower) in return for regular interest payments. They can be issued by governments, municipalities, or corporations. For example, a city might issue green bonds to finance the construction of energy-efficient public buildings or a renewable energy company might use them to fund a new wind farm.

These are some of the typical projects that fall under the green finance umbrella:

♦ Renewable energy and energy efficiency
♦ Pollution prevention and control
♦ Biodiversity conservation
♦ Circular economy initiatives
♦ Sustainable use of natural resources and land

The European Investment Bank, the EU’s lending arm, released the first green bond in 2007, followed by the World Bank a year later. Numerous businesses and governments have since entered the market to fund green initiatives. By 2023, the market for green bonds is expected to be valued at $2.36 trillion. The US, China, and France are the top three countries that issue green bonds.

Greenwashing is a significant challenge in the green bond market, but regulators and the industry are working to address it. The Green Bond Principles and the EU’s voluntary Green Bond Standard aim to increase transparency and help investors assess and compare green securities.

GREEN BONDS IN INDIA

The first Green Bonds to be issued in India were announced in the Union Budget 2022–2023.

According to the Green Bond Framework, the capital raised from the bonds would be used to build clean infrastructure. The biggest issuer of green bonds in India is Greenko Group, supporting wind, solar, and hydroelectric power projects throughout multiple states. The first local government body in India to issue a green bond is Ghaziabad Nagar Nigam, an Uttar Pradesh civic authority. In 2023, the Indore Municipal Corporation issued green bonds of USD 87 million. Although recognized as sufficiently safe with low credit risk, the coupon rates offered by the MCs are often greater than the government bonds of same maturity.

CONCLUSION

According to a news analysis by BloombergNEF, the global spending on transitioning to clean power in 2022 was $1.1 trillion which was the same as the amount spent on producing oil and gas. This indicates a rising trend in green finance. It is especially significant since the fossil fuel industry has attracted far more capital than green projects after the signing of the Paris Agreement up until the COVID-19 pandemic. It is clear that Green Finance has got a resounding ‘green’ signal from governments to banks and NGOs, steering us toward a brighter, sustainable future.

One might wonder why we don’t solely rely on grants for sustainable projects, much like other socially relevant initiatives. Grants from governments and philanthropic organisations undoubtedly play a crucial role. However, they fall short when it comes to reversing, or at the very least halting, the environmental damage caused by carbon emissions. An estimated $400-600 billion per annum is needed to finance conservation of land, forests and water, and more than $350 billion of incremental capital is needed to fund projects in renewable energy and energy efficiency, according to the World Bank. And less than 15 per cent of the necessary money is allocated to conservation, with the majority of funding coming from charitable and public sources.