Sustainability has been a hot topic in recent years, with thought leaders across nearly every industry trying to come up with innovative green initiatives that will allow them to become more efficient and responsible with resources. The financing industry is no exception. Green finance initiatives have shown significant promise, with many people finding sustainable investing beneficial both to themselves as well as the environment.

What Is Green Finance?

Green finance is defined as any type of financing option that promotes sustainable initiatives or environmentally friendly projects, according to Chartered Banker. For example, a company that secures a loan in order to create a low-carbon emission factory is participating in the green finance phenomenon. According to the United Nations Environment Programme, green financing initiatives are designed not only to benefit the environment and promote the importance of sustainability but also to provide investors with a generous return on their investment. To put it simply, green and sustainable finance is a win-win for everyone involved.

Green Finance vs. Traditional Finance

There are a few distinct differences between green finance and traditional finance. While individuals looking to secure green financing have a variety of options available, the primary instrument to fund green finance initiatives is the green bond, according to the World Economic Forum. Green bonds can be secured to fund specific projects that reduce carbon emissions or protect the local environment, such as those focused on:

• Renewable energy
• Biodiversity conservation
• Pollution control
• Sustainable resource use

Traditional finance, on the other hand, can be secured for a number of reasons and is not tied to any environmental result. Traditional financing is often used for:

• Investing
• Major purchases
• Business endeavors

Green Finance vs. Sustainable Finance

The terms green finance and sustainable finance may seem interchangeable, but there are a few differences to consider. Green financing is reserved specifically for projects that reduce carbon emissions, improve energy efficiency and have a positive impact on the local environment.

Sustainable financing, on the other hand, weighs environmental, social and governance factors into investment decisions to promote sustainability while generating economic output and improved social outcomes. Both green financing and sustainable financing, however, work to showcase the fact that economic success and sustainability can be intertwined.

Rise of Ethical Investing

In the United States and across the world, it seems that everyone is jumping on board with the trend of ethical investing — and many are hoping this will be a lasting commitment to economic growth and environmental responsibility. According to Global Market Insights, the sustainable finance industry is booming. The market size for sustainable marketing was estimated at about $4.2 trillion worldwide in 2022, with an anticipated annual growth rate of 22.4 percent expected by 2032. Additionally, demand for green bonds is on the rise. The U.S., China and France are the largest issuers of green bonds, with many countries seeing green bonds as an opportunity to generate interest in sustainability efforts.

ESG Criteria

Environmental, social and governance factors — also referred to as ESG — play a key role in sustainable financing. Green finance and sustainable finance options consider ESG criteria as part of the financial decision-making process to help ensure the initiative would generate economic growth while simultaneously protecting and preserving the environment.

Types of Green Financing

There are several types of green financing available, and it’s important to understand the differences between these financing options to secure the option that is right for your investment. According to Emeritus, these are some of the most common types of green financing:

Mortgages and Loans

Green mortgages and loans are available to consumers and investors seeking to buy property that has been enhanced with environmentally-friendly features. For instance, a green mortgage may be issued to a buyer interested in investing in a home with solar panels on the roof and that will primarily use solar energy to heat and cool the home. In addition, a person buying an electric car may be able to secure a green auto loan for their purchase.

Credit Cards and Banks

Individuals who are looking to get involved in the green finance industry can actually apply for a green credit card or rely on a green bank to manage their personal finances.

There are several credit card companies that offer credit cards designed to offset carbon emissions. For example, the Aspirations’ Zero card plants one tree for every purchase a consumer makes on their credit card.

The number of green banks is on the rise as well. In fact, green banks have increased by more than 20 percent in the past decade, with green banks investing more than $7 billion in sustainability initiatives and green projects.

Bonds

Green bonds are one of the most common types of green financing. These bonds, which are issued by national governments, allow consumers to invest in environmentally-friendly projects directly. The earnings on any bond investments are earmarked for green projects, such as those that support biodiversity conservation, renewable energy, recycling, clean air and more.

Green Asset-Backed Securities (ABS)

Green asset-backed securities are a form of green financing backed by sustainable assets, according to Intuition. Solar ABS, for instance, is a type of ABS backed by loans that were acquired to move forward on solar energy projects, and it is a well-established option increasing in popularity.

Benefits of Green Finance

One of the reasons why green financing is becoming so popular is the fact that the benefits are twofold. Not only do these investments help reduce the impact of climate change and improve the environment, but they are also lucrative investment opportunities for individuals and businesses alike.

These are some of the top benefits of green finance to consider:

• Environmental impact – Green finance is helping to fuel environmentally-friendly projects, and it allows for the advancement of sustainable technology. By investing in green finance, individuals and corporations assist with developing eco-friendly infrastructure, implementing long-term resource management and improving green technology that reduces carbon emissions.
• Social responsibility – In addition to helping the environment, green financing instills a sense of social responsibility into investors. By recognizing there is an inherent responsibility to manage the environment and work to mitigate the impact of climate change, investors are able to fund projects that benefit the greater good.
• Financial returns – The green finance market has produced significant investment returns, which means investors benefit on a personal level, too. By proving capitalism and environmental responsibility can go hand-in-hand, green financing has become one of the most lucrative investments of our time.

Risks and Challenges

As with any type of investment opportunity, there are risks and challenges associated with green financing. Some of the risks to consider include:

• Market volatility – The strength and stability of the worldwide economy could hamper the growth of green finance. For investors to unite behind a common cause, they need to be reasonably assured their investments will pay off in both the short and long term.
• Regulatory considerations – According to the International Monetary Fund, stronger regulation and a consistent code of conduct needs to be developed and adhered to in order for investors to feel confident knowing their investment will help to further green initiatives and produce actionable results.
• Evaluating greenwashing – Greenwashing is defined by Investopedia as the act of providing false or misleading information to members of the public or investors about the actual environmental impact of a project. For example, an organization could apply for green financing to secure funding for a particular project yet rely on greenwashing to falsely convince investors that the project will have a larger or more significant environmental impact than it actually does. Greenwashing may occur more often than most would like to think, so it’s important to be aware of the act and to work to mitigate it as much as possible to move the sustainable finance movement forward.

Green Finance in the Banking Sector

Within the banking sector, green finance is on the rise as well. Mutual funds and exchange-traded funds are two types of sustainable investment funds that work to invest in companies that promote sustainability through the development of environmentally-friendly infrastructure or eco-friendly technology, among other initiatives. The purpose of these funds is to attempt to generate investment returns while simultaneously providing financing for initiatives that work to improve the environment, reduce carbon emissions and hopefully slow the rate of climate change. As the banking sector continues to see the power and productivity of green finance, there is expected to be more sustainable investment opportunities in the future.

Explore Your Passion for Sustainable Finance at Johnson & Wales University

At Johnson & Wales University, our finance degree programs take a future-forward look at the industry while providing students with a universal foundation in the most critical financing concepts. We offer an online Bachelor of Science in Finance, an online MBA degree with a focus in finance, and an online MS in Finance degree, allowing you to choose the program that is right for your personal and professional goals. For more information about completing your degree online, complete the Request Info form, call 855-JWU-1881, or email [email protected].