The Impact of Green Finance: A Global Catalytic Effect
What are our Future FinTech Champions learning at the moment? And what are their thoughts on the current development of FinTech? Read through this submission from one of our FFCs, Ashtha Devi Hurchurn, currently studying Finance with Specialisation in Banking @ Curtin University [Submission made in September 2023].
In a time when environmental concerns have escalated to a crescendo, green finance has been revealing itself as a powerful driver for a transformative change in the fintech world. Green finance, as broad of a term as it can be, has been described by International Development Finance Club (2013) as the incorporation of environmental, social, and governance (ESG) components into financing decision-making. This aims to foster sustainability and redirect monetary assets toward ecological and equitable financial projects. This article seeks to successfully examine the relevance and importance of green financing and how it is leading to disruptive changes in the fintech world.
There are several ways financial institutions are bringing about transformative changes through green finances. Some of them are as follows:
1. Promoting Sustainable Investments
To aid in the low-carbon transition, most governments and financial institutions around the world are considering how they can encourage the shift from non-sustainable bonds to green bonds (OECD 2015). ICMA (2015) defined “green bonds” as a fixed-income financial instrument to raise capital from investors through the debt capital market. These funds are to be used to finance or re-finance green projects. They differ from regular bonds as they are issued officially as “green” by the issuer or another entity. Green bonds not only financed several renewable projects that brought about positive environmental impacts like improved energy efficiency or conservation of natural resources but is also addressing United Nations Sustainable Development Goals (SDGs) 13 (Climate Action), SDG 7 (Affordable and Clean Energy), and SDG 11 (Sustainable Cities and Communities) (UN n.d.). CIM Financial Services (CIM Finance) which is a non-banking financial institution was the first Mauritian company to issue green bonds. It has plans to raise over Rs 3 Billion to fund the company’s Green Lease product which aims to stimulate the transition to hybrid and electric vehicles (CIM Finance).
Source: Economic Times
2. Changes in Corporate Social Responsibility
Green financing has been indispensable in transforming how firms and financial institutions tackle Corporate Social Responsibility (CSR). This was proven to be true for developed countries like the US, China and Germany (Statista 2022) but in some underdeveloped countries, this statement would not be valid due to circumstances like the lack of financial infrastructure or awareness. Nevertheless, companies have not only integrated Environmental, Social, and Governance (ESG) principles but are also embracing circular economy principles to maximize resource efficiency. Pressured to address environmental impacts, global and Mauritian local companies are trying to integrate sustainability into their business models. One great example is a credit facility scheme called “Lokal is Beautiful” which was launched by the Mauritius Commercial Bank (MCB) in 2019. It targeted local small and medium enterprises (SMEs) and through this scheme, they are able to enjoy lower interest rates (“MCB Group | Sustainability,” n.d.). Business Mauritius has also launched “SigneNatir” which is a community led initiative whose mission is to ensure that the business community are engaging in sustainable consumption and production. Moreover, Walmart (2018), one of the largest retailers in the USA, launched Project Gigaton in 2017 to engage suppliers to reduce a billion metric tons (a gigaton) of greenhouse gases from their supply chain operations.
3. Implementing Sustainable Financial Instruments
Sustainable financial opportunities which were once deemed as complex and inaccessible to the public are now being revolutionized through the emergence of green financing. Banks and other financial bodies have made green mutual funds and sustainable Exchange-Traded Funds (ETFs) more popular in countries that are already acknowledging the threats of climate change and acting in a sustainable way. It is not only contributing to personal moral fulfillment, but studies have also shown that there is more potential for higher returns in the long run (Marszk 2019). In order to help corporates understand the inclusion of sustainability in the Mauritian business setting, the Stock Exchange of Mauritius (SEM) launched the SEM Sustainability Index (SEMSI) in September 2015. This moved the SEM to be a more sustainable capital market and became the second Stock Exchange in Sub-Saharan Africa to promote sustainability (“SEMSI – INDICES – Stock Exchange of Mauritius,” n.d.).
4. Risk Management and Value Creation
Incorporating Environmental, Social, and Governance (ESG) concerns into financial decision-making processes has become more crucial for investors looking to maximize financial returns while also contributing to a positive socio economic effect. As green finance is gaining popularity, both investors and the public are more interested to seek for investment opportunities that guarantee both profits and value. ESG factors are linked closely with risk mitigation and there are a lot of ways that led to sustainable investments. Even though traditional financial reports allow a company to identify financial risks, integrating ESG elements can help in pointing out environmental and societal issues. For years studies have shown that companies that make investments in green technology may be better able to withstand changes in non-renewable energy costs. Similarly, businesses that stress employee welfare may benefit from employee loyalty and public support during harsh periods of time. During the Covid-19 pandemic, Patagonia, an outdoor apparel company, having offices in United States, the Netherlands, Japan, South Korea, Australia, Chile, and Argentina gained traction for keeping its employees safe and paid (Patagonia 2023) and this was only possible through the effective management of risks through the use of ESG components.
5. Promoting Transparency and Innovation
Green Financing tools compel issuers of securities to officially report on the ecological effects of particular projects except for countries whose regulatory bodies are complex. This documentation guarantees that investors are kept up to date on the precise environmental benefits generated. If green bonds have been issued, data must be provided on the amount of clean energy generated and its greenhouse gas emissions. This forces investors to be transparent and enforces accountability. Since 2013, the City of Gothenburg in Sweden has been issuing green bonds aimed at boosting and improving public transit and lowering carbon emissions (Bond n.d.). Additionally, the African Development Bank (AfDB) has been actively supporting the growth in African green bonds sector. The AfDB’s strategy is to promote inclusive and sustainable growth (Ford 2022). Another significant outcome of green financing is the promotion of innovation. The necessity of tackling environmental concerns and attaining sustainability goals has compelled industries to create unique products and up their level of creativity. As this market expands, new opportunities are available for investors to make a positive influence while making profits.
As we have seen, Green Finance has grown to be an influential trend pushing changes in the financial system locally and internationally. It has effectively led capital towards sustainable projects that would address environmental concerns and hastened the financial sector to a greener society. Furthermore, this movement could be pivotal for Africa as a whole as green financing may stimulate economic growth by funding renewable energy, sustainable agriculture, and water resource initiatives, all of which are critical for lowering poverty rates.Conclusively, it is without a doubt that through a mix of green finance and progressive monetary policy which refers to increasing interest rate and using the return to finance climate action and reduce inequality, economies can emerge as powerful entities that can transcend the constraints of traditional governmental cycles and lead to economic sustainability and success for future generations to come.
REFERENCES - PART 1
“Cim Finance Issues Mauritius’ First Green Bond.” Blog.cimfinance.mu. https://blog.cimfinance.mu/innovation/cim-finance-issues-mauritius-first-green-bond.
“Green Bonds Issued Worldwide 2014-2022.” n.d. Statista. https://www.statista.com/statistics/1284029/green-bonds-issued-worldwide-by-country/#:~:text=Between%202014%20and%202022%2C%20The.
Ford, Neil. 2022. “Africa Poised for Green Bond Growth.” African Business. May 16, 2022. https://african.business/2022/05/finance-services/africa-poised-for-green-bond-growth.
MAPPING of GREEN FINANCE DELIVERED by IDFC MEMBERS in 2012.” 2013. https://www.cbd.int/financial/publicsector/idfc-greenfinance-2013.pdf
REFERENCES - PART 2
Patagonia. 2023. “Our Footprint.” Patagonia. 2023. https://www.patagonia.com/our-footprint/.
“SEMSI – INDICES – Stock Exchange of Mauritius.” n.d. Www.stockexchangeofmauritius.com. https://www.stockexchangeofmauritius.com/products-market-data/indices/semsi
“Sustainable Development Goals | United Nations Development Programme.” n.d. UNDP. Accessed June 29, 2023. https://www.undp.org/sustainable-development-goals?gclid=CjwKCAjw8ZKmBhArEiwAspcJ7gB6QJR6ZdqTOXZ3lYPNm1OhuhaZSfdZ7t5_5F92cWvfOt3P3GuWwRoCRCwQAvD_BwE
Walmart. 2018. “Project Gigaton.” Walmart Sustainability Hub. February 21, 2018. https://www.walmartsustainabilityhub.com/climate/project-gigaton
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