For satisfying the growing demand, new financial instruments, such as green bonds as well as carbon market instruments have been established, along with their new financial institutions, known as green banks and green funds. Together, such instruments and their institutions constitute the green finance.
In simple terms, green finance is a new finance term that involves engagement of traditional capital markets for creating as well as distributing a wide range of financial products and services which can deliver both investable returns and outcomes that are environmentally positive. This also involves internalizing environmental externalities along with the adjustment of risk perceptions in terms to boost environmentally friendly investments and to reduce the ones which are environmentally harmful. Promoting green finance over a large as well as economically viable scale helps in ensuring that green investments have more priority over usual investments of business which may perpetuate in the unsustainable growth patterns.
What is green finance?
Green Finance consists of all the initiatives that are taken by the private and public agents (such as businesses, banks, governments, international organizations, etc.) for the development, promotion, implementation and support of projects having sustainable impacts through the new financial instruments.
In other words, Green Finance provides you with the financial tools that are required by the active agents for increasingly generating activities with positive and durable externalities.
Some examples of Green Finance projects are:
- The promotion for renewable energy projects, energy efficiency, water sanitation projects and environmental audits.
- Such projects also include the projects which involve the reduction of transportation as well as industrial pollution, effects on climate change, deforestation, and carbon footprint.
It is also crucial to note that for these changes or we can say projects take long run to produce the desired outcomes; and along with the project initiatives the active involvement by public, private and international organisms is also required.
Why is green finance important?
Green Finance is important because it promotes and also supports the flow of financial instruments along with its related services for the development and implementation of sustainable models of business, their investments, trade, economic, environmental and related social projects and policies. Financial sector plays an important role with the intermediary functions and its risk management functions by advancing sustainable economic development and directing the investment towards the real economy.
Moreover, because of the lessons learned by the global financial crisis which occurred in 2006-2009, the need for much more sustainable business practices, like Green Finance Initiatives became important. Green finance practices are also addressing towards the 2030 Sustainable Development Goals (SDG’s) which aims in shift of focus from just the economy to the economic, environmental and social terms.
Green Finance represents the financial sector future making use of innovative financial mechanisms and with the initiative of supporting the investments for projects having positive and sustainable externalities.
A green bond is a type of bond that is specifically earmarked to use for climate and environment related projects. These bonds are usually linked to asset and are backed with the issuer's balance sheet, and sometimes also referred as climate bonds.
Green bonds are considered as designated bonds with the intention of encouraging sustainability and supporting projects related to climate or other special environmental projects. More precisely, green bonds are used to finance projects which aim to support energy efficiency, pollution prevention, sustainable agriculture, fishery and forestry, the protection of aquatic and terrestrial ecosystems, clean transportation, sustainable water management and the cultivation of environmental friendly technologies.
Benefits of green bonds
Green bonds tend to enhance an issuer's reputation, because it helps to showcase their commitment towards sustainable development. It even provides them with access to a particular set of global investors who make investment only in green ventures. With an increased focus of foreign investors within green investments, it also helps in the reduction of capital cost.
Benefits of investing in green bonds
Green bonds enable the investors with a way of earning tax exempted income with the related benefits of personal satisfaction, knowing that the investment they have made will be used in a responsible and positive manner. The issuers of green bonds also gets benefited, as the green angle helps in attracting a new subset of investors, from whom they can avail profit by an extended period vs. a base of older investors. High demand of green bonds equates in lowering the borrowing costs. Lower borrowing costs results in reduced expenditures, which can be passed down to the investor.