Green finance is no longer an axiom for the financial sector seeking to benefit from social credentials. ESG considerations have contributed to many investment decisions in recent years. Companies across sectors are taking an interest in sustainable finance with a growing push from governments to achieve climate goals.

A new study from TheCityUK and BNP Paribas showed that global green financing has grown over 100 times hitting a market value of $540.6 billion in the past decade. Signifying the way for businesses and consumers to reduce their carbon footprint without breaking the bank, green finance and sustainable finance assist businesses in the development and implementation of environmentally sustainable business practices.

Businesses, consumers and shareholders are asking for a firm commitment to environmental, social and governance (ESG) priorities. Organizations need to look beyond today’s immature regulatory guidance and sustainable investment category to develop strategies that will position them to lead as market expectations continue to rise, says Arindam Gangopadhyay, Vice President, BFSI, HCLTech.

The rise of sustainable finance

Sustainable finance seeks to place capital investments into projects that reinforce ESG considerations and sustainable development. The purpose of sustainable finance is to enhance adaptation efforts to combat climate change, pollution, biodiversity and the circular economy by providing financial resources to opportunities.

Landmark international agreements were achieved with the adoption of both the UN 2030 agenda and sustainable development goals and the Paris climate agreement. The Paris climate agreement includes the commitment to align financial flows with a pathway toward low-carbon and climate-resilient development.

Similarly, the European Green Deal's Investment Plan aims to unlock private funds through EU financial instruments, notably InvestEU, which would lead to at least €1 trillion of investments to create the right environment—or ‘enabling framework’—to facilitate and stimulate the public and private investments needed for the transition to a climate-neutral, green, competitive and inclusive economy.

To ensure that sustainable investments deliver on their promises, the global accounting body the International Financial Reporting Standards Foundation has set up the International Sustainability Standards Board to come up with new rules to validate sustainability claims.

Green financing has also gained considerable traction in Asian countries like India and Singapore with the respective governments taking several initiatives to encourage green investments. The Indian government launched the National Action Plan on Climate Change that outlines a national strategy that aims to enable the country to adapt to climate change and enhance the ecological sustainability of India’s development path.

It also identified eight major missions, including the National Solar Mission, the National Mission for Enhanced Energy Efficiency and the Green India Mission, among others to promote sustainable development in various sectors of the economy, including energy, transport, agriculture and forestry.

To decarbonize the economy quickly, Singapore is planning to expand its focus, which is now solely on green finance, to one that also includes transition finance by mapping out clear definitions, encouraging innovation and extending grants. Known as Asia’s oil hub, Singapore will achieve this through the Monetary Authority of Singapore’s (MAS) refreshed Finance for Net Zero Action Plan.

Similarly, as fintech strives to automate financial services and streamline processes, green fintech in India is focused on reducing emissions and promoting biodiversity. This new focus is dedicated to leveraging technology to drive environmental sustainability and create a healthier planet.

Role of fintech in green finance

Technology innovation has emerged as an important element in encouraging green, sustainable development. As fintech endeavors to automate and streamline financial services, green fintech is focused on promoting biodiversity and reducing emissions. This new cause is dedicated to leveraging technology to drive sustainability and create a healthier planet.

“Fintechs can be enablers in facilitating the collection and analysis of climate-related data,” says Gangopadhyay. “Emerging technologies like artificial intelligence, big data, IoT and blockchain can help monitor the environmental and economic impact of climate-related risks,” he adds.

With the growing urgency for innovative climate solutions, blockchain and artificial intelligence technology are emerging as powerful tools to transform green finance, especially as transparency, credibility and traceable information are critical in measuring and monitoring climate impact.

Innovative green financial products, such as green bonds, green loans and green stocks are being developed every day. The transparency and granularity of these products can only show positive environmental impact provided the underlying data is measurable and verifiable.

Gangopadhyay adds, “Though not yet mainstream, we are likely to see increasing use of technology solutions for the monitoring of green stocks, bonds and loan compliance in the coming year.”

Types of green finance

As green finance continues to grow, there are many green products and sources businesses and consumers can choose from to reduce their carbon footprints.

1. Green bonds: Green bonds are fixed-income financial instruments like regular bonds that are exclusively used to fund projects that have positive environmental and or climate benefits, such as renewable energy and green buildings. The green bonds market is growing rapidly. Recently, the European Union issued approximately $14 billion of the bonds, where the money raised will support projects including a research platform for energy transition in Belgium and wind power plants in Lithuania.
2. Green stocks: According to the International Energy Agency (IEA), renewable power sources will surpass coal to become the world’s biggest source of electricity generation by early 2025. There is a lot of interest in investing in green energy stocks as shareholders in the top renewal energy stocks leading the transition away from fossil fuels are likely to reap the rewards as governments continue to focus on climate change.
3. Renewal sector of private equity: The goal of the renewal sector of private equity is to find attractive renewable energy investments that provide investors favorable risk-adjusted returns while also growing the baseload energy of wind and solar, biofuels, biomass and other real assets in sustainability.
4. Green Mutual funds: Green mutual funds focus on companies and projects that promote sustainability, reduce carbon footprints and contribute positively to society and the environment. It is an investment vehicle that pools money from multiple investors to invest in a diversified portfolio of environmentally friendly and socially responsible assets. Green sector funds invest primarily in specific industries such as renewable energy, clean technology, sustainable agriculture, green transportation and more that contribute to a sustainable future.
5. Green Banks: According to research, the number of green banks in the US increased from one to 20 between 2011 and 2020, investing $7 billion in renewable energy. Green banks employ public funds to spur private investment in renewable energy and other environmentally friendly initiatives while functioning like traditional banks.
6. Socially Responsible Investing (SRI) funds: SRI funds target companies that adhere to ethical business practices and demonstrate a commitment to community development. These funds exclude investments in industries that are considered harmful to society, such as tobacco, firearms and fossil fuels.

To summarize, the growing urgency for climate solutions will see many more innovations in green finance and climate tech in the coming years. Technology and green finance are likely to play a bigger role together in efficiently implementing climate solutions to help organizations reach climate goals faster.