We are all familiar with “Green Economy” where jobs are now created towards a greener vision, aiming at reducing carbon emissions and limiting global temperature rise. But what about “Green Financing”? Putting it into words, green financing is a loan or investment that supports environmentally-friendly activities such as improving energy efficiency of your home or switching to electric vehicles or even building a sustainable infrastructure. And as we begin to recover from the pandemic, green finance presents a huge opportunity to build back a greener future while fighting against climate change. Climate change and environmental degradation are sources of risks for the wellbeing of our societies and the prosperity of our economies.
Green finance is now in the mainstream and is becoming the new norm, as risks associated with environmentally-damaged products and services increase and people are investing in green alternatives. Such investors are financial actors looking for investment opportunities in companies or funds, designed to create value both for them as investors, in the form of financial return, and for the society as a whole, through the achievement of a sustainable agenda focused on inclusive growth and climate wealth over the long-run.
Banks too are increasingly making more green finance available and accessible to fund green projects such as wind and solar farms, and to invest in businesses themselves to help them become greener. Banks therefore play an essential role in supporting the transition to a low carbon economy by helping people and businesses access the money to support their eco-friendly activities; thus, creating a “Great Green Multiplier” effect where both the economy and environment continuously benefit.
Growing concerns about the ecosystem has led governments and businesses globally to focus on environmental sustainability by developing the right structure and mechanisms for green finance, working towards a more sustainable economy with the aim of creating diversification across businesses and attracting foreign investments. With that, investment strategies are also shifting with eco-friendly finance at the forefront of ever changing market trends, placing Environmental, Social and Governance (ESG) considerations at the heart of business and investment decisions.
Achieving sustainability goals requires major investments, and as ESG scrutiny has increased, investors’ appetites for sectors such as petrochemicals and refining have declined proportionally, allowing them to fund solutions to the problems facing the society, while earning financial returns. ESG-conscious investing is about achieving growth through purpose, with the intention of generating positive, measurable social and environmental impact alongside a financial gain.
Nowadays, established companies have been compelled to respond to calls by institutional investors to incorporate responsible environmental, social, and governance initiatives into their business models as a condition to continued support in public capital markets. Other companies have opted for emerging forms of legal entities, so-called social enterprises, which explicitly incorporate sustainability and multi-stakeholder interests into their governance and reporting frameworks.
Sustainable finance is important for at least two reasons; first, good practice has shifted to where it always have been, valuing all forms of capital and not just one. Second, investors are demanding more transparency and accountability from companies, not less.
But nothing comes for free. Making the necessary lifestyle and business changes to become greener can be expensive, especially in poor countries or where climate change is most vulnerable; but such costs for green financing vary between regions, like for example in the GCC, the cost of producing solar, wind and green hydrogen are 2 to 3 times cheaper than in other countries Globally, adding to this that GCC countries have already embarked on the transformation to sustainability. Given that climate change and environmental degradation are global challenges, international cooperation is in the common interest.
New Milestones are frequently added that lead us to a better understanding of sustainability. Finance functions are now remodeling renewable energy investments into their contracts and analyzing their effect on returns, while assessing the risks associated with climate change. The future of finance is stakeholder capitalism. Shareholders are no longer the dominant audience; employees, communities, customers, regulators and the planet as a whole, are all factors that should be integrated in the decision-making scheme of where capital is allocated.
There remain significant questions on the future evolution of sustainable finance as an asset class. An important challenge is the standardization of measurements of the impact of climate change on the asset’s value and the means to assess ESG-related factors; despite the initiatives being placed in this regard such as the ESG ratings and Impact Measurement Project, the challenge remains in the measurement being very subjective in context. Not to forgo the costs that these measurements require through continuous monitoring studies over time.
What today is considered green finance will soon be the core component of the finance industry as sustainable investors want to ensure that their investments are not only financially viable, but also make a positive impact on the world.
The broader scope of sustainable finance encompasses more than just climate change threats. It entails the problems generated from economic and social sustainability, as well as creating a mutual prosperity for current and future generations.
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