Mostly, Green finance is defined as the requirement level is minimum for financing & investment processes.
Green finance consists of three major terms, Green bonds, Green lending, and Green equity investment.
Green Bonds are termed as “Green” concerning the Green Bond Principles (GBP) which is quite often verified by an external reviewer. They assess whether its alignment is realistic as per the environmental impacts of green projects. Even though, there are exceptions where schemes related to labels and certifications are used for certifying the bond greenness, for example, Climate bonds Standard & Certification Scheme by CBI (Climate Bonds Initiative).
As per Green Bond Principles, “green bonds are any type of bond instrument where the proceeds will be exclusively applied to finance or refinance new or existing eligible green projects.” So, it means, a bond to be “green”, it has to explain how the bond is going to be used. The green bond was issued by Commercial bank, Corporate, Asset-backed security (ABS), Sub-sovereign/Municipal, Development Bank, and Sovereign.
The Green bonds have been rated in different terms by CICERO and Standard & Poor’s (S&P). CICERO differentiate the bond into three shades. “Light green, the project is environmentally friendly but not for a long-term vision”. “Medium green, the projects are long-term vision-oriented” and “Dark green, projects provide that are with solution for future”.
Standard & Poor’s (S&P) Green evaluation certifies assets that green bond issuers have the right to submit a second opinion. A green impact score is obtained by the evaluator which mainly based on mitigation or an adaptation score. The “greenness” is evaluated by carbon hierarchy approach technology.
The CBI (Climate Bond Initiative), LuxFLAG and ISO (International Standards Organisation) institutes, emerging in the process of developing standards, labels and certification schemes.
The next term is Green lending which means originating the green loans by various Banks. Credit eligibility is usually under the compliance with technically eligible criteria. The eligibility criteria for green are usually accompanied as per the list of technologies or products. One of the major initiatives taken by the collaboration of multilateral development banks with the International Development Finance Club based on the principle for tracking climate Mitigation finance. The joint association shows the benefit of having a partnership towards a common goal.
IDFC (International Development Finance Club) was tracking all the green lending financial activities from 2011 to 2014. The green finance was categorized into three themes- “Green energy” and mitigating greenhouse gases; adapting the impacts of climate change and environmental objectives.
The third term is Green equity investment where strategies of different measurements are used to make sustainable investments which are mostly done via index investing or equity funds. Various indexes which are transparent and developed for tracking the performances of green industries, firm, and investments. In the equity market, the activity is focused on a holistic approach to sustainable development.
The following strategies are mainly used for such green investment: —
Screening for potential investments, ESG integration requires systematic and explicit inclusion, Corporate engagement and shareholder action for influencing behavior of the corporate world, Sustainability themed investing in clean energy, green technology or sustainable infrastructure and impact investing for creating positive social with a measurable impact or outcomes from environmental policy with financial returns.
Source: — Handbook of GreenFinance by Jeffrey D.Sachs.