What is Green Finance?

Businesses

Green finance, at its core, is finance that supports the allocation of capital to green projects, investments or activities, in preference to non-green alternatives. For something to be green finance, it will ideally achieve at least one of these three things for a given green activity or project: (1) an increase in revenues, (2) a reduction in the cost of capital or (3) a reduction in risk. 

A useful definition of Green Finance:

Your next question might then be, “what is green?” Well, there are no universally accepted definitions as of today. Despite this, the definition below – adapted from one of the most important so far, published by Bloomberg BNA in 2017 in a paper entitled ‘Defining Green Finance for Climate Change’ – provides a comprehensive starting point to try and build an answer to that question:

Green finance may refer to any financial instrument or investment – including equity, debt, grant, purchase & sale or risk management tool (for example: investment guarantee, insurance product or commodity, credit or interest rate derivative, etc.) – issued under contract to a firm, facility, person, project or agency, public or private, in exchange for the delivery of positive environmental externalities that are real, verified and additional to business as usual, whereby such positive externalities result in the creation of transferrable property rights recognised within international, regional, national and sub-national legal frameworks.

Green finance, when implemented as part of a comprehensive approach, has an important role to play in the achievement of sustainable development. 

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