Green Finance

Green finance can be understood as “financing of investments that provide environmental benefits in the broader context of environmentally sustainable development.”

Green finance has been an evolving term and the taxonomy is different, for example, in Europe and in China. Generally, green finance aims to allocate capital to economic development that protects the environment, which can include financing projects to protect agains pollution (e.g. air pollution, water pollution), climate change, loss of biodiversity or protection of water ways. Green finance is one element to support sustainable development together with the social and governance dimensions.

Understanding green finance (Source: IIGF)

Through different green finance instruments, projects can be financed for example in:

  • renewable energy, such as wind or solar,
  • energy efficiency,
  • sustainable transport, such as public transport, rail transport, electric mobility,
  • waste and waste-water treatment,
  • re-forestation,
  • soil remediation

An overview of projects that can be supported through green finance instruments can be found for example in the Chinese green bond catalogue and the Climate Bonds Taxonomy of the Climate Bonds Initiative (CBI).

Instruments of Green Finance

Several instruments are available for green finance. These include, for example

  • green bonds – where capital is raised on public markets in the form of bonds and the proceeds are earmarked for funding climate and environmentally friendly projects,
  • sustainability-linked loans – where the interest rate of the loan is linked to the ESG performance of the borrower,
  • green loans – where capital is given between the lender and the borrower without a public market.
  • green insurance – which cover economic compensation liabilities caused by environmental pollution accidents. Mandatory insurance can increase returns and lower risks on green finance.

Green Finance Market

Green finance has been steadily growing over the past years. The first green bond was issued by the European Investment Bank , labelled “Climate Awareness Bond”. Over the years, other multilateral banks, such as the World Bank, and ever more private and commercial banks followed issuing green bonds.

A cumulative USD 173,4 billion of green bonds were issued, according to Refinitiv. In BRI countries, USD 57.4 billion worth of green bonds were issued, with China accounting for about 40% of the green bonds proceeds in the BRI, followed by Italy and South Korea.

Many banks globally and in China have committed to accelerate green finance. The World Resources Institute has analyzed the leaders of the global financial system and their commitments to making their portfolio more green and environmentally aligned.

Green Finance in China

China has seen a particularly fast development of green finance. China pushed Green Finance on the agenda of the G20 meeting in Hangzhou. However, the first Chinese government policy that was related to “green finance” was issued by the People’s Bank of China (PBOC) already in 1995 – the “Notice on Credit Policy for Environmental Protection”.The Banking Regulator CRBC released the “Green Credit Guideline”, encouraging banks to promote environmental objectives and considering environmental risks in their lending. The currently most relevant Guidelines for Establishing the Green Financial Systemwere published with the endorsement of China’s State Council – the highest governing body.

The Green Finance System in China is regulated by NDRC, which publishes the “Guidance on Green Bond Issuance” for corporate issuance, and the PBOC, which publishes the “Green Bonds Endorsed Project Catalogue” for Chinese banks bond issuance.

China was the largest market for green bond issuance with about 23 billion USD according to Refinitiv, ahead of the United States with about 20 billion USD.