Margaret Mead rightly said, “We won’t have a society if we destroy the environment.” The Global Risks Report prepared by the World Economic Forum in 2020 for the first time was dominated by environmental issues. Out of the 10 major risks highlighted in the Global Risks Report, five are environment-related.
The Green Revolution in the financial sector is the most unexpected revolution and the most significant one. It has brought three different stakeholder groups together – the researchers, environmentalists and the financial community. The history of the green movement goes back to the concept of sustainability. In the 1990s, the concept was popular as Corporate Social Responsibility (CSR). After CSR came the concept of sustainable finance, and thereafter emerged green finance. It was after the UN Climate Change Conference held in Copenhagen in 2009 that the first Green Climate Fund (GCF) was established to provide international funding for environmental issues. The Paris Agreement 2015 has been one of the greatest stimulators for bringing the financial community into the domain of environment, climate and sustainability. An interesting point to note is that not only the financial sector impacts the environment but the financial sector is also exposed to environmental risks. A report by Partha Sarathi Dasgupta, Professor of Economics at the University of Cambridge, stated that the financial sector is also exposed to environmental risks like physical risk (depreciation of its fixed assets due to climatic situations), and with growing consumer awareness about environmental issues, the litigation risk has also come into play.
Green finance takes under its ambit the environmental considerations along with financial objectives. In layman’s terms, green finance or environmental finance means the financing of investments that considers the environmental impacts of those financial decisions. Green finance plays a significant role in environmental protection, energy conservation and emission reduction. Green finance additionally helps in achieving the 2020 Sustainable Development Goals. Key players engaged in green finance include banks, stock exchanges, institutional investors, financial regulators, insurance companies, and capacity-building institutions.
The novelty and niche nature of the concept raises certain questions about its popularity and acceptance. The main issue is that though the importance of green finance has been deeply felt and highlighted, however, there exist serious gaps in the field of green finance. Reviewing the gaps which have impeded the growth of green finance will help us find solutions for the same, the very first being the funds needed in green finance. The available climate finance is approximately $391 billion, which is far away from the required amount of climate funds of $5.7 trillion per year. The Green Growth Knowledge Platform, which is a community of experts in this field, stated that public sources of finance will alone not be able to fill the huge gap of funds and that private sources of finance are the need of the hour. Secondly, the definition of key terms in the domain of green finance is also a debatable topic. The newness of the concept also poses a challenge to its popularity. The Green Growth Knowledge Platform has stated that there exists huge information asymmetry in the domain of green finance and there is no clarity on what constitutes ‘green’ in green finance. Unless green finance is not defined clearly and accepted globally, it becomes difficult for all the stakeholder groups to adopt green finance.
Another key gap is that policy uncertainties exist in green finance. The regulators and governments are not active in framing and monitoring green finance issues. No commonly accepted international legislation exists in the field of green finance, also country-wise no stringent regulation exists on green finance. Not receiving support from the regulatory authorities creates unwanted insecurities amongst the stakeholders of the financial system and they refrain themselves from adopting and implementing green finance. The last is the research and development efforts being put in the direction. There exist fewer research studies on green finance. On top of that, the publication opportunity of research articles written on green finance is less as finance journals are still not giving adequate attention to green finance. This has slowed down the growth of green finance research.
Each of the gaps discussed above needs to be closed. Organizations at the country level should make ways for funds that can be deployed in the field of green finance. Private sources of funds should be particularly encouraged to invest in green finance. Public funds can be raised by taxing environmentally-harmful activities, or by levying carbon tax, etc. Also, organizations at the international level should offer a clear definition of what constitutes green finance. International organizations like the Intergovernmental Panel on Climate Change, Green Growth Knowledge Platform, and the UN can come up with standard definitions as their proposed definitions will be accepted globally. Next is the need to increase awareness amongst various stakeholder groups. Especially the researchers should take up more studies on green finance in the developing nations. Additionally, a few more steps can be taken to stimulate the growth of green finance. Efforts should be made to divert the flow of funds from situations that have nature-negative outcomes to nature-positive outcomes. The best way to divert the flow of funds is to improve the risk-return profile of green investments. Also, financial institutions should be held accountable for their activities towards the environment by way of tightening the disclosure norms. Regular reporting of environmental activities by financial institutions in a standard format will help to track their green performance in a year, over the years, and also the comparison of green performance amongst various financial institutions can be done.
Efforts from various units of the financial system are needed to change the green finance scenario. The green revolution in the financial system can be sustained by innovating green financial products and policies, and also by bridging gaps that already exist in the financial system.