Green finance refers to financial investments in environmental goods and services (for example, the protection of biodiversity), and also schemes that encourage sustainability (such as policies to encourage investment in renewable energies).
Businesses are being encouraged to come up with plans to become carbon neutral or “net zero”.
Therefore, green finance is part of this jigsaw as regards the financing of green strategies pursued by companies.
This is finance from banks to fund green projects. The finance is often supported by governments.
With borrowers often obtaining better terms than standard loans, this type of funding is popular.
However, the borrower must show that their project has a positive environmental impact as laid out in the official framework – The Green Loan Principles (GLP).
Sustainability linked loans.(SLLs)
These are not to be confused with green loans above. Here, the borrower must achieve specific sustainable or ESG targets.
This will then, with the pricing mechanism of the SLL, trigger a cheaper finance than a conventional loan.
Bond finance is a major part of ACCA AFM which all students should be familiar with. Green bonds are now part of this family.
The company can raise money for climate and environmental projects using a fixed interest green bond.
As with standard bonds, these will be secured/collateral backed and have to get the normal credit rating from the agencies.
The benefit lies in the tax incentives to the investor in relation to IT & CGT. This makes them an attractive investment.
Their popularity has grown hugely and are now regulated by the Climate Bonds Standard Board. They certify that the bond will channel finance to environmentally beneficial projects.
Shareholders will not want to miss out on the green finance revolution.
Hence many stock markets produce an index of firms that satisfy social and environmental criteria.
This helps equity investors target investments in companies with higher standards of behaviour in terms of social responsibility.