Green Financing: Sustainable Lending In The Time Of Climate Change – Qrius

VidhiBatra

Pick up the latest newspaper and browse through the headlines, an issue you will see consistently brought up is that of climate change and its effects on several sectors of the economy. Reports highlighting heat waves, sea level rise and increasing carbon emissions have become common terms, tossed around on a daily basis, for any regular reader.

As is the case with several other industries, financial policy makers have also begun waking up to the damaging impact of climate change, bringing the world on the brink of a fundamental shift in lending and investment behavior.

There has been a surging shift towards Green Financing that aims to increase financial flows from public, private and not-for-profit sectors to sustainable priorities.

The key aim of this is to better manage environmental and social risks while taking up opportunities that encourage a better growth rate alongside environmental benefit and deliver greater accountability.

This cause can be promoted through changes in the countries regulatory frameworks by undertaking investment in clean technologies, financing for sustainable natural resource-based green economies, alignment of a climate-smart economy and so on.

The Green Bond market

Globally, there has been a remarkable interest among firms, especially those of the private sector to scale up investments dedicated to mitigate and adapt to climate change driven by growing concern about these issues and the enormity of the economic costs and financial losses facing the financial sector.

The most obvious reflection of this interest is the rapid growth of the Green Bond market accounting for new issuances surging to more than $250 billion in 2019. So, what is a Green Bond and how is it different from a regular bond market instrument?

The Green Bond is a fixed-income instrument that finances environment-friendly projects and appeals in particular to an expanding pool of investors who are interested in making measurable, beneficial social and environmental impact, while earning commercially appealing returns.

While capital markets play a significant role in transitioning towards a green economy, it is also necessary to understand that a large number of underdeveloped nations do not necessarily depend on such markets for financial assistance. In such cases, traditional financial agents like banks can play an important role in lowering the carbon footprint of rapid growth by redirecting capital flows to environmentally responsible projects and clean technologies.

National adoption of Green Finance

Market regulators, mainly the central banks and governments of different countries can use a combination of policy, guidelines and incentives to steer the national banking systems towards adoption of a clean and green economy. This has been successful in the several countries aiming towards making their overall growth sustainable by adopting climate-conscious outlooks.

For example, green credits such as loans to projects offering energy savings or emission reductions now make up approximately 10% of the portfolios of Chinas top 21 banks owing to mandatory Green Credit Guidelines issued by the Peoples Bank of China.

Moreover, the government of Malaysias Green Technology Financial Scheme has incentivized banks to extend loans actively to green projects by offering a 2% rebate on the total interest charged as well as a 60% guarantee of the total approved loan.

Another interesting type of loan that is gaining traction is the Sustainability-Linked Loan in which the proceeds of the loan are used for general corporate purposes, rather than green projects, but the pricing of the loan is based on the borrowers environmental, social and governance (ESG) score or overall sustainability achievements such as emission reductions.

If the borrower achieves its sustainability target, it benefits from favourable interest rates on the loan. If it fails, it pays a higher rate.

In a nutshell, Climate Change is a global responsibility to be tackled through joint efforts, especially today, when its gradual but imminent effects can be felt directly through depletion of resources, deterioration of natural habitats and rising pollution; putting us at the periphery of destruction.

Green financing of sustainability projects that encourage the economy as a whole to pursue environmental-friendly projects through investment in green technology is the only way to sustain prolonged economic development.

Moreover, it is also a new way to secure financial inclusion by introducing low-risk securities backed by the government, that guarantee lucrative returns by allowing those earlier excluded, to participate in the capital markets.

To put it simply, a greener economy ensures future security, social inclusion alongside prolonged and equitable growth.

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Green Financing: Sustainable Lending In The Time Of Climate Change - Qrius