Green Finance refers to new financial instruments whose proceeds are used for sustainable development projects, initiatives, environmental products and policies under the single goal of promoting a green economic transformation toward low-carbon, sustainable and inclusive pathways. It is constituted of new financial instruments such as green banks, green funds, green bonds and carbon market instruments, and involves engaging traditional capital markets in creating and distributing a range of financial products and services that deliver both investable returns and environmentally positive outcomes.
At the core of today’s globalised economy are financial markets through which banks and investors allocate capital to different sectors. The most important thing to note is that capital allocated today will shape ecosystems, and the production and consumption patterns of the future. Having said this, the public sector funds and development assistance can supply only a small portion of green investments. Therefore, the private sector needs to fill financing gaps for green investments over the long term.
How can this be mobilised at scale?
According to the ADB report Catalyzing Green Finance , the whole financial system needs to be reoriented to support a green economy. To scale up, governments need to team up with a range of actors to increase capital flows and develop innovative financial approaches across different asset classes. In doing so, this can help catalyse the much larger flows of private finance that is necessary to unlock green business innovation on a wider scale.
To facilitate this transition, an enabling framework that promotes green finance will be required to help educate and change people’s mindsets and behaviours. In due course, this could lead to subsidies for fossil fuels being phased out, while subsidies for green products (such as electric vehicles) could be phased in. Disclosure should also be made mandatory, ensuring that companies and banks are made accountable for the environmental damage of the companies that they lend to.
If countries are to achieve sustainable development in line with the United Nation’s Sustainable Development Goals, then investments must be made in green areas. That’s why there is a specific need to promote green finance on a large and economically viable scale, as it helps ensure that green investments are prioritised over business-as-usual investments that perpetuate unsustainable growth patterns. This focus should be on the greening of an existing infrastructure, or the spending on and mobilisation of additional investments in key sectors, such as clean energy, sustainable transport, natural resources management, ecosystem services, biodiversity, sustainable tourism, and pollution prevention and control.