When responding to the financial environment – 15.12.2022, at 14:33
Green finance, also called sustainable finance or responsible finance, is a growing field that aims to support projects and initiatives that contribute to the transition to a green economy and the fight against climate change. This can include investments in renewable energy, clean technology, sustainable infrastructure, forests and farmland, and businesses that adopt sustainable practices.
Although the first green finance initiatives date back to 2001, it is a field of finance that really started to develop in the 2010s. Since then, the fight against global warming has grown stronger and more and more interesting. revealed.
Can green finance really fulfill its role? If so, with what?
WHO ARE GREEN FINANCE INTERESTS?
Green finance attracts. Both private and public players are mobilizing to better understand this emerging and growing market, but they still need to be distinguished:
First of all, issuers such as governments, banks or even large listed companies issue green financial securities such as green bonds.
This is followed by asset managers who intervene with green funds and select their components.
It also takes into account the various rating agencies as well as regulators who regulate and assess the risks and impacts of applied labels and proposed liabilities.
More generally, and to fully understand the range of stakeholders this brings together, we find governments, banks, institutional investors, businesses and consumers. They work together to promote sustainable and low-carbon investments, as well as raise awareness of the benefits of green finance.
DIFFERENT TYPES OF GREEN INVESTMENTS
There are several types of green investments, each with their own advantages and disadvantages. Here are some examples:
Green bonds are bonds issued by governments or companies to finance environmental projects, such as installing solar panels or improving public transportation infrastructure.
Green investment funds are portfolios of assets that invest in companies or projects related to the environment.
Investments in renewable energy such as wind or solar power plants can help reduce greenhouse gas emissions and promote the use of clean energy sources.
Investments in sustainable infrastructure such as public transport, roads and green buildings can improve environmental quality and facilitate the transition to a green economy.
Investments in forests and agricultural land can contribute to protecting ecosystems and combating climate change.
Thus, sustainable investments can provide many benefits for the environment and the economy. They can help reduce greenhouse gas emissions and protect fragile ecosystems, as well as create green jobs and promote economic growth in environmentally-related sectors.
For investors, this “eco-finance” can also be profitable: by investing in sustainable assets, entrepreneurs can actually reduce their exposure to risks related to climate change and natural resource depletion. They can also benefit from the growth of environmentally-related sectors and take advantage of tax incentives offered by governments to support green finance.
However, it is important to note that green investments also carry risks. Environmental projects can be expensive and difficult to implement, especially in developing countries. Additionally, there is no formal definition of what constitutes green investing, which can lead to inconsistencies in investment strategies. Finally, different actors involved in green finance may have diverging interests, which can make it difficult to align goals. For example, investors may have different requirements in terms of return and risk, or green bond issuers and investors may have different interests regarding loan terms such as amount, term and interest rate.
EXAMPLE OF GREEN BONDS
Therefore, they can be used to finance projects such as installing solar panels, improving public transport infrastructure or reducing greenhouse gas emissions.
These are usually for a fixed term and offer a fixed or variable interest rate. When the bond matures, the issuer repays the amount originally borrowed with accrued interest.
They can be issued by governments to finance national projects or by companies to finance environmental projects in their operations.
They offer a number of advantages, such as:
Contributing to the transition to a green economy: by financing environmental projects, green bonds can help reduce greenhouse gas emissions and promote the use of clean energy sources.
Tax incentives: Governments can provide tax incentives to support green finance that can benefit investors in green bonds.
Profitability: green bonds offer an interest rate that can be attractive to investors looking for a regular return on their investment.
However, green bonds also have disadvantages, such as:
Issuer default risk: As with all bonds, there is a risk that the issuer will not be able to repay the investment at maturity.
Interest rate risk: changes in interest rates can affect the value of green bonds and therefore the return on investment.
Liquidity risk: It may be difficult to sell green bonds before maturity, which could lead to losses for investors.
In general, green bonds offer benefits such as contributing to the transition to a green economy and tax incentives, but they also carry risks such as issuer default risk and interest rate risk.
A REALLY GREEN INVESTMENT?
One of the challenges facing green finance is the ambiguity of the definition of green investment. In the absence of a formal definition, there may be inconsistencies in investment strategies, which may lead to different interests among different actors involved in green finance.
Some investments, for example, may be considered green by some actors and not by others. This can make it difficult for investors to know which projects are eligible for green finance and can create confusion about the objectives of green finance.
In 2016, the state created the SRI (Socially Responsible Investment) label. To obtain this aggregate, investment funds and management companies must invest this money in companies that meet the three criteria of ESG: Environmental, Social and Governance.
In five years, 153 management companies managing more than 800 investment funds have been certified for nearly 700 billion euros.
Environmental organization Reclaim Finance analyzed more than 300 green funds and found that the vast majority were securities in the fossil fuel, arms or human rights sectors.
Some justified themselves by claiming that their approach was not to sanction these companies, but to encourage them through the transition process.
To address this discrepancy, it is essential that governments, banks, investors and companies work together to clearly define what constitutes green investment and establish criteria for eligible projects.
Green investment standardization initiatives can help clarify these criteria and increase investor confidence in this area. By working hand in hand, green finance actors can ensure that supported projects truly contribute to the transition to a green economy and the fight against climate change.
It should also be noted that green finance is not limited to investments in environmental projects. It can also include sustainable finance practices, such as integrating environmental, social and governance (ESG) considerations into investment decisions or using innovative financing mechanisms to support sustainable projects.
Green finance is a growing field that aims to promote sustainable and environmentally friendly financial practices. This can take the form of investments in green projects, such as renewable energy or reducing greenhouse gas emissions, or green borrowing, such as green bonds.
Green finance is important because it can help fight climate change and protect the environment. However, there are challenges to green finance, including funding, risk assessment and regulation.
Despite these obstacles, green finance is a promising field that offers many opportunities for investors and companies concerned about their environmental impact, and it is important to continue to support and develop this sector to advance the transition to a green economy and the fight against climate change. . By working together, green finance actors can contribute to a more sustainable and prosperous future for all.
Directed by Mathis Erba, with assistance from Charles Dhennin, Mark Dagher
The article was originally published on DT Expert