Truth be told, the association between sustainability and finance is not one that comes to mind organically. In saying that, it seems that the two terms are more closely related one might think and 2021 might be the year we see them parade our newsfeeds holding hands more than ever.
Today, we’ll have a look at what Green Finance really is and why it’s suddenly picking up steam in the FinTech world. Let’s dive right into it.
What Is Green Finance?
While there is no agreed or official definition for what green/sustainable finance really is, the term is used to describe financial activities that work towards a better environmental outcome. These activities include but are not limited to renewable energies, energy efficiency, water sanitation, environmental audits and more.
How Recognized Is Sustainable Finance?
According to Statista, from 2012 to 2019, 23 of the world’s 50 largest banks had made public commitments to sustainable finance. The turning point for this change of heart was the Paris Agreement in 2015, which drafted a global framework to circumvent threatening climate change for the planet. The Agreement highlighted the need for investments in green technologies, and the importance of countries’ ability to manage with climate change and what comes with it.
While banks have been funding sustainable projects for many years, the Paris Agreement enabled them to halt investments in non-renewable or non-sustainable projects. The Canadian Bank of Montreal has committed 300 billion U.S. dollars between 2019 and 2025 for the cause, opening the floodgates for more banks to follow. The Bank of America joined the initiative by committing to 300 billion USD between 2020 and 2030.
Then, you have the issuance of green bonds. According to Reuters, the European Central Bank holds around 20% of all euro-denominated green debt, even though it only started buying corporate bonds in 2016. This shows a willingness to expand and enrich the green agenda. Talking of bonds, agendas and portfolios, the first nine months of 2019, saw investors allocate a record $89 billion into global green loans.
According to a recent survey, global annual Green Bond issuance increased by 49% from 171.1 billion to 254.9 billion US-Dollar. The value of green bonds traded could soon hit $2.36 trillion with US, China and France being the top three green bond issuers These are record numbers for the global Green Bond market which shows great potential going forward.
The numbers are one thing but when the European Commission devotes resources to sustainable finance. The EU is examining how to integrate sustainability considerations into its financial policy framework in order to mobilise finance for sustainable growth. In the coming months, the Commission is expected to present an “ambitious” sustainable finance strategy to prompt private investment to align with EU’s climate targets. It was only a year ago when The European Green Deal was established. That initiative aims to turn the EU economy sustainable by implementing the following action plan:
- Investing in environmentally-friendly technologies
- Supporting industry to innovate
- Rolling out cleaner, cheaper and healthier forms of private and public transport
- Decarbonising the energy sector
- Ensuring buildings are more energy efficient
- Working with international partners to improve global environmental standards
As you can clearly see, the future of sustainable finance is set up for success. According to Damien de Saint Germain, Head of Credit Research & Strategy at Crédit Agricole CIB: “We expect the green, social and sustainability supply to accelerate in 2021. We estimate that it could reach EUR600bn, an increase corresponding to 55% as compared to the amount issued in 2020.”
What was previously thought of as a niche, is now the topic of discussion in mainstream platforms. Just watch consultant Vinay Shandal talk about how conscious investors can turn up the heat and make companies change on a recent TED talk. Couple that with the fact that companies like Goldman Sachs and HSBC are all in on sustainable finance and what you immediately understand why Green Finance is blossoming.