With a growing strain on natural resources, increasing climate change concerns and insufficient investment in green initiatives, the financing gap is more pressing than ever.
Green finance, the practice of making investments that have an inherent positive environmental impact, has gained traction within the financial industry as it allows investors to combine financial return with environmental benefit.
However, environmentally-conscious investments are needed on a much greater level if global ambitions such as the Paris Agreement, the UN Sustainable Development Goals and the recommendations of the G-20 Green Finance Study Group are to be met.
With an estimated $300 billion to $400 billion per year necessary to preserve healthy ecosystems, according to research by Credit Suisse, it is ever more evident that funds from both public and private sources are needed to address the pressing environmental needs.
Green finance encourages private sector investment into new and burgeoning areas such as green financial technology (fintech) and infrastructure, which generate economic return while working towards low carbon environments, adapting to climate change and promoting sustainable living.
As the broadening infrastructure financing gap becomes more evident, organizations are increasingly looking toward measures that will catalyze investment in clean growth while building on their investment potential. And although green finance has been moving up the agenda recently, there has to be some significant acceleration in flows of investment if targets agreed by global organizations are to be achieved. Strong economic development and measures to address climate change can be effectively combined. But it is becoming clear that private capital is vital in tackling environmental challenges such as conservation, greenhouse gas reduction and climate change concerns. The development of standardized financial tools to encourage this source of investment is key in addressing these issues.
Along with stricter targets in place to tackle environmental concerns, the move towards green investments is strongly driven by millennials, a huge and influential investor group. This generation is focused on the future of the global environment, and as such are leading the trend of investment into clean technology, renewables and smart buildings. They are more likely to invest in businesses that generate positive environmental impact as well as solid financial return.
Technological innovations are inevitably a major part of this trend. Productivity improvements through digitalization, blockchain and artificial intelligence are expected to be instrumental in the move towards a low carbon future. The development of these kinds of cutting edge technologies opened new investment opportunities as well as triggered changes in the financial industry itself.
Green real estate investment is proving to be an impactful and lucrative area for many companies that are increasingly capitalizing on the growing demand for buildings which meet thorough new environmental standards. Sustainability — both in the real estate sector and beyond — is of substantial concern for investors, and programs such as the Climate Bonds Initiative, which promotes capital market investment in projects focused on sustainability and other climate-related issues, are indicative of this. The move towards this sort of investment is a considerable trend, with $130 billion of green bonds estimated to be issued in 2018, according to the Climate Bonds Initiative. With $81.6 billion issued in 2016, there has been significant growth in a very short period of time.
Investment into the clean energy sector is continuing apace, there are 42 green bonds listed on the LSE in seven different currencies, according to the Green Finance Initiative, and 38 green companies which have raised $10 billion in London, including 14 renewable investment funds. It is clear that the rapid growth in green-focused investment and flows of capital into climate-related projects using cutting-edge financial technology is an important trend. There is little doubt that, as Burkhard Varnholt, deputy global CIO at Credit Suisse, asserts, "Sustainability will soon have become an integral part of investing.
The gap between the current financing of green projects and the environmental targets that the international community has committed to achieving is significant. And given that currently only a tiny fraction of global funding — primarily in the form of bonds — is green, further development into this area will allow the financial services industry to help address climate change and other environmental concerns.
However, there is definitely growing traction, and with more support from private capital sources, the potential to have a banking system which has a significant positive impact on our environment while also proving a stable platform for strong returns is very real.