Sustainable Finance is an alignment of the financial system with sustainability criteria that combine profit seeking while addressing sustainability issues. It is a shift to a more holistic framework that involves assessing environmental, social and governance metrics while making financial decisions. In other words, it is a philosophy of investing that merges traditional investments that target purely financial profit with philanthropic donations that don’t seek any financial returns, with an aim of combining purpose and impact with profitability in investments.
In the sustainable finance market, green bonds have been the most popular instrument as they offer an innovative vehicle that provides long-term, large-scale financing solutions for green assets and projects such as renewable energy, energy efficiency clean transportation and adaptions measures. Investments in climate change adaptations, constitute the largest number of climate bond issuances.
Green investments and climate change impact investments are the two most common sustainable finance instruments prevalent in the market today. The foundation of the sustainable finance market were laid out in 2006 when the Principles of Responsible Investment were first adopted. 1
Green Investments that deliver climate change impact are the most common in the sustainable finance market. There are two kinds of climate impact investments – Climate Change Mitigation and Climate Change adaptation strategies. Climate change Mitigation aim to reduce greenhouse gas emissions. Examples of this category of investments include Renewable Energy, Energy efficiency, Green buildings, Clean transportation and Forest preservation. Climate change Adaptation initiatives aim to adapt economies and societies to the inevitable consequences of climate change. Such projects may include but are not limited to urban infrastructure ,climate resilient agriculture, climate friendly agri-business value chains and information support systems. A small segment of green investments also include those that seek to address other environmental issues (apart from climate change) such as biodiversity conservation and pollution prevention and control.
This framework paved the way for a first of its kind, Climate Awareness Bond, issued by the European Investment Bank in 2007, a type of financial instrument that linked carbon and equity where the principal was backed by renewable energy and energy efficiency assets. This led to the introduction of the first Green Bond. Green bonds are a type of financial instrument, where the proceeds are used to finance green projects or activities that are aligned with a set of defined green criteria.
The first labelled Green bond was launched by the World Bank in 2008. See the link to the journey of the first green bond issuance by the World Bank. https://www.youtube.com/watch?v=i3gIJrABLSc
Green bonds offer several positives such as providing the opportunity to invest and identify green products for investment. They also help investors to improve their intelligence on climate issues and contribute to reduction in climate stress exposure. They provide transparency to the use of proceeds and allow in depth dialogues between issuers and investors.
More broadly, climate change threatens long-term returns of investments and undermines the ability of people to live in a stable and prosperous world. Investors will be confronted with the economic , social and environmental impacts of climate change. Allocating capital to companies with high external costs, can lower asset values and reduce returns for investors. If investors integrate, the risk of externalities such as floods and pollution into their investment decision making process they can not only create the expected value for their customers and provide collateral benefits to the wider community as well.
The total green bond market is now close to USD 1 trillion.2 While the market is evolving very quickly, investments in low emission infrastructure is still incipient when compared to traditional high emission ones. As per the World Bank group, low emission infrastructure investment remains less than 1% of the overall portfolio of institutional investors.
The investment needed in low-emission and climate resilient infrastructure is estimated by OECD to be USD 6.9 trillion a year upto 2030. Aligning financial flows with low-emission, resilient development pathways, is now more critical than ever to meet the goals of the Paris Agreement and deliver on the 2030 Sustainable Development Goals. 3
India has become the second-largest market globally for green bonds with $10.3 billion worth of transactions in the first half of 2019, as issuers and investors continued to adopt policies and strategies linked to sustainable development goals, according to the Economic Survey of 2019-20. 4