An in-depth look at green finance
We often say money makes the world go round, but does the same concept apply when it comes to saving our planet? Transitioning to a green economy will certainly cost money and thus, the issue of how we pay for the shift naturally becomes a topic at every stage of the debate. In this comprehensive read, we are going to take a closer look at green finance and if it might be the solution to ascertaining low and sustainable carbon emissions down the line.
What is green finance?
In order to comprehend the importance of green finance, it is imperative to take a step back and think just how important finance is to our current lives and the economy in general. Finance sits at the heart of how the economy operates, be it for individuals, companies or nations.
When looking to purchase a home, chances are you will turn to a mortgage solution. You may utilize a personal finance deal to purchase a car, make house improvements, pay for holidays and so forth.
If you have money to invest, you may purchase stocks and shares or pay for a pension in order to save for your retirement. If you are looking to launch a business, or invest in technology/equipment, you may take a business loan.
At a national level, when the government has to invest in new infrastructure, they may give out a new bond on the world financial markets. When a developing country looks to develop a new power plant, they may take a loan from a development bank designed for such reasons.
So, what is green finance?
Simply put, a green loan is normal finance, but the car, house, business, infrastructure, or any other investment is green. If you purchase an electric car using finance, this is considered green finance. If you secure a loan to improve your home’s energy efficiency, that is green finance. If you put your money in an investment fund that supports green technologies, then that is green finance. When an organization secures a loan to invest in efficient equipment or a nation takes out a loan to invest in renewable energy facilities, again- that is green finance.
Generally, the examples mentioned above are labelled as green, but not all types of green finance are explicitly badged. If you have a pension plan, for example, it is inevitable that your fund will have investments that support the shift to a green and sustainable economy. This means you might be already investing in green finance without your knowledge, particularly because solar and wind have become mainstream in the energy and investment fields.
Green finance is not a magic wand
Considering the importance of finance across the world, when looking to battle climate change, it is evident that finance will have to be increasingly shifted towards greener results. For example financing electric cars, low carbon houses, shares in clean-tech firms, as well as renewable energy infrastructure rather than their carbon-intensive substitutes. Green finance is paramount, and thus the increasing focus on its availability.
However, it is also vital to keep in mind that finance alone can’t drive the shift. A huge proportion of the United Kingdom population can afford to take loans to get an electric vehicle. There are numerous financing options out there, but just because they can afford to do so doesn’t mean they will.
The Government’s Green Deal is a great example of green finance’s limits. This was a scheme based on the idea that if finance was readily available to people, then they would implement cost-effective measures like new insulation and boilers. However, the reality was far more complicated.
The demand did not materialize and the House of Commons Select Committee deemed the scheme’s implementation as ‘’woefully low’’. Just because homeowners could afford to take the relevant measures did not mean they wanted to. One barrier was eradicated, but others remained. The United Kingdom Green Homes Grant Scheme, which gives vouchers to England homeowners to make energy-saving house improvements may be more promising, but the results are yet to be seen.
Green finance is vital, but it’s not a silver bullet.
Private or government?
The Green Homes Grant and Green Deal schemes are examples of government-sponsored green finance strategies. However, green finance can come from both government and private sources, and usually a combination of the two. In fact, most of the finance for wind turbines and solar energy comes from private markets. As earlier mentioned, wind energy is an established technology and the market for investment is mature. This means there’s less need for government intervention or influence.
However, when the government deems there isn’t sufficient private finance to drive the required changes, they may decide to intervene and loan government money in order to accelerate the green policy initiatives.
This was what happened in 2012 when the United Kingdom Government made the Green Investment Bank fill some of the renewable energy investment gaps. In this case, however, it was not long until the private sector caught up, making private investment plentiful. Having filled the initial gap, in 2017, Green Investment Bank’s portfolio was sold to the private Investment group Maquarie, making a profit in the process.
Since government loan funds are usually used to invest in newer or challenging projects, it’s not unusual for them to have support programmes designed to create a pipeline for successful projects. The UN Green Climate Fund is an excellent example of this. The developing economies are supported in every aspect of developing green projects starting from implementation, with the recognition that finance will not solely green the economy. A wider support is required. It is evident that there’s a role for both the government and markets in the green finance field and it is imperative to seek the right balance between the two.
And there you have it, a comprehensive look at green finance and how it can be made to work for a better tomorrow.
