Green Finance Introduction

What is green finance and what role can the financial sector play in climate-change mitigation?

• Green finance supports the transition to a sustainable, low carbon world, or helps financial institutions and clients manage climate-related and other environmental risks
• The scale of investment required –$6 trillion per year for the next 20 years – means that public funds will not be sufficient: up to 80% of the funds required will need to come from private sources. The financial services sector can play a key role in supporting transition by mobilising and directing private capital
• The financial services sector is also impacted by climate-change, creating significant climate-related financial risks such as asset impairment and stranded assets
• Regulators consider abrupt transition as a systemic threat to the financial sector stability. Identifying, measuring and disclosing climate-related financial risks is a key aspect of green finance, and a major focus for regulators, policy-makers and financial institutions

What is driving the growth in green finance?

• The legally-binding Paris Agreement on Climate Change requires countries to make flows of finance consistent with low greenhouse gas emissions and climate-resilient development
• The EU is considering green supporting factors for bank capital allocation
• Central banks are introducing climate-related risks into stress test scenarios
• Regulatory frameworks, standards and guidance, including the Taskforce on Climate-Related Financial Disclosures (TCFD), the UN Principles for Responsible Banking, the Green Bond Principles, the Green Loan Principles, and the Climate Bonds Standard

What are financial markets doing to take advantage of green finance opportunities?

• The Green Bond market grew to approximately $167bn by 2018. Issuers have been sovereigns, government agencies and international organisations; cities, towns and municipalities; companies; and financial institutions
• Green mortgages and an ever increasing range of green retail banking, retail investment and insurance products are now available world-wide
• Sustainable, responsible or ethical investing now accounts for some $23 trillion of assets under management globally – about a quarter

What does green finance mean in practice?

• Measures and reports on the climate-change mitigation and adaptation impacts of investments
• Obtains expert external reviews, verification and certification of the environmental impacts and outcomes of investments to ensure the integrity of green finance and avoid greenwashing – false or misleading claims about environmental impacts