What is green finance?

As the global economy adapts to climate change, businesses and investors are developing green finance, new ways of rating environmental credentials, risks and opportunities, backed by funding instruments and new sources of investment. Green finance is a sign of the world economy’s accelerating transition away from the fossil fuel era.

At its simplest, green finance means any structured financial activity that’s been created to ensure a better environmental outcome and a more resilient future. It includes loans, debt mechanisms and investments that are used to encourage the development of green projects, minimize the climate impact of existing plans, or a combination of both.

Typical initiatives that fall under the green finance umbrella include renewable energy and energy efficiency, pollution prevention and control, biodiversity conservation, circular economy initiatives and the sustainable use of natural resources and land.

Green financing has been devised to increase the level of financial flows from the public, private and not-for-profit sectors towards more sustainable development priorities. A key part of this approach is to better manage environmental and social risks, realise economic opportunities that combine a good rate of return and positive benefits, and deliver all this with greater accountability.

Green finance channels funds to sustainable practices that have environmental benefits and good financial returns. The approach fits in with the United Nations Sustainable Development Goals, with capital allocated today shaping ecosystems and the production and consumption of tomorrow.

To enable this, initiatives such as Chapter Zero have been launched. This aims to ensure that board at all businesses have climate literate representatives on them who understand climate-based decision making. Embracing sustainability is about establishing the balance between risk and opportunity and carefully considering a return on investment in the broadest sense, putting sustainability and the green agenda higher up the list of priorities.

As sustainability becomes a key element of long-term business planning, green finance can help the development and delivery of those plans across the entire operational function of a business. The systemic risk posed by the climate crisis to financial services requires decisive action and a rapid pivot towards the opportunities presented by the zero-carbon economy.