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A guide to green financing

BY READERS DIGEST

5th Apr 2022 Managing your Money

A guide to green financing

Green finance, also referred to as eco-investing refers to investments that help preserve or improve the environment or climate.

This entails the activities by public and private institutions, including banks, companies, governments, non-profit organizations, etc. Green finance includes all types of initiatives and activities like developing, promoting, and implementing projects with sustainable business models or impacts. In addition to making funds available for green projects, eco-financing also aims to minimize risk perceptions for eco-friendly projects.

Simply put, we can say that green finance represents any structured financial action that results in a better environment. These actions could be investments, loans, or any other financial instrument. Also, we can say this form of financing applies if the proceeds of a financial instrument are utilized for sustainable initiatives or a better environmental outcome.

Comprehending the term: Green finance

Any loan or financial instrument or investment that helps support green activities like purchasing green products and services, or developing an environmentally friendly infrastructure is referred to as green financing.

For instance, money used to promote renewable energy, conducting environmental audits, etc. In addition, investments that help reduce carbon footprint, lower pollution, and deforestation ideally fall under this form of financing.

Currently, making the switch to green loans, products and services is expensive. That is because of the high cost of production attributed to lower productions and developing technologies in comparison to their counterparts. A good example is electric cars or bikes, where the cost is higher compared to a vehicle running on petrol or gasoline. Eco-financing, however, is meant to prompt and incentivize people and companies to switch to eco-friendly products. As a result, it makes both consumers and businesses take the environment/climate into consideration when making decisions. 

Understanding climate finance

People tend to use the terms climate finance and green financing interchangeably and while the two may sound similar, there are a few key differences worth noting. As a matter of fact, climate financing is a branch of green financing. Primarily, climate finance includes public finance and the efforts made by developed nations to make financing available in order to fight climate change. On the other hand, green financing is a broader term that entails all forms of finance, such as green loans with environmental objectives.

Promoting green finance- What are the steps?

In order to promote eco-financing, the following is either being done or needs to be done:

-Make the necessary changes for green financing to a country’s regulatory framework.

-Encourage varying sectors to engage in green financing.

-Align the public sector financial decisions with sustainable objectives in regards to development

-Boost the use of green bonds

-Encourage public and private partnerships in green projects.

What are the current trends in green financing?

A good example of green financing activity and instruments is green bonds. The United States, France, and China are among the largest issuers of green bonds while the European Central Bank (ECB), also plays a vital role in such activities. According to estimates, the green bond market could reach $2.3 trillion in the near future.

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