Everything around us has become digitized. We have e-books, online shopping, internet banking, and more. So, technology is a crucial part of our lives. Considering its speed and efficiency, experts aim to utilize modern tech to save the environment. This post will focus on green finance and why it matters.
What is green finance?
Green finance refers to financial investments with specific and measurable goals to save the environment. For this, officials need to undertake renewable energy funding projects. Plus, they can take feasible forestry initiatives.
In short, this green financing system allows financial institutions to use practices and processes while considering environmental, social, and governance factors. We have experienced a sudden expansion of sustainable financing in recent years. But what drives this move?
- Sustainable Development Goals – The COVID-19 pandemic hit the vulnerable and poor unfairly. It encouraged managers, investors, clients, shareholders, and society to adopt and achieve the Sustainable Development Goals of the United Nations. That means stakeholders and investors look for assets that abide by environmental, social, and governance factors.
- Mitigating sustainability problems – Investing in green finance enables investors and businesses to combat risks of sustainability issues, including climate change. Studies suggest that climate-related risks are priced in different asset classes, including bonds, equities, mortgages, and real estate. So, higher sustainability risk means investors and firm operations will get affected. For this reason, they have financial implications.
- Insurance-like benefits – Another reason that led to the growth of green finance is insurance-like benefits against the market and firm-specific blow-ups. By practicing social responsibility, businesses can build social trust or capital.
All-in-all, this tech-based financing system is essential in ensuring a sustainable future. Are you wondering how? Do not worry! We will explain its importance below in detail.
What is the importance of “green” in green finance?
Since the mid 20th Century, people have become aware of human activities that impact the environment negatively. We are not saying humanity has the inbuilt tendency to destroy the ecology. But the agricultural and industrial revolutions are the primary culprits. After all, they use tools and things that result in climate change and other problems.
For instance, modern practices in these industries consume resources like water and fossil fuels to an extent that has never happened before.
That said, the adverse effects were unknown. Instead, systems and technologies are created to make our lives easier. If we consider fossil fuels, they are beneficial to humanity in various ways. On the other hand, they have several limitations for the natural world.
Remember, without a proper functional environment, life cannot sustain itself on Earth, including human beings. Thus, it is critical to harmony with nature. Recently, we have witnessed forest fires, melting icebergs, prolonged droughts, and temperature fluctuations. All these are the result of an imbalance in the ecosystem.
So, how can green finance help mitigate challenges and ensure a sustainable place to live? Let us learn why it is a suitable solution to curb environmental change.
- Multidisciplinary approach
When it comes to climate change, there is no quick fix to this. That means a single industry or technology cannot stop carbon emissions. Besides environmental problems, we face other issues like biodiversity loss. Therefore, this calls for a multidisciplinary approach.
Keep in mind that many industries need to engage while adapting to different changes. Let us take an example of whole supply chains. Each supplier would be using a specific zero-carbon method and equipment. Thus, they have to adapt while decarbonizing.
Fortunately, green finance can handle this issue with ease. If we talk about finance, it serves several industries simultaneously. And it knows how each area works.
- Handling intangibles
The finance industry knows how to handle intangible concepts. And based on them, they can make contracts. Bonds, insurance, mortgages, and money are non-physical phenomena contrary to CO2 emissions. However, they are measurable, valued, sold, brought, and inherited
As mentioned, CO2 emission is a physical concept. Thus, it takes work to measure it in real-time. Moreover, explaining it conceptually is even harder. That is where green finance steps in. It helps create contracts based on environmental complexities. Once common approaches and vocabularies are developed, it will make a big difference. As a result, individuals can contextualize issues, which results in greener decision-making.
- Financial sustainability
There is no doubt finance is essential for modern society. Therefore, businesses need solutions that offer financial sustainability combined with environmental sustainability.
Money is the only way to put food on the table, and buy clothes and housing. Not many in “developed” countries can build or make these things from scratch. If one does not respect the economic nature of today’s society, it will be difficult to find many listeners.
Since business behavior is dependent on economic fundamentals, an approach with a combination of financial and environmental fundamentals is practical. However, green finance can alleviate the negative aspects of the current financial system and create more opportunities.
The bottom line
Hopefully, you know why there is a demand for green finance. With this tech-based approach, you can facilitate harmony between financial sustainability and environmental sustainability. We can say that the future is green, as more businesses will invest in climate-friendly projects.
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- What is the best way to promote green finance?
We can ensure green finance by supporting the public sector to create an enabling environment. Besides this, we can promote public-private partnerships based on financing mechanisms like green bonds.
- What are the common examples of green investments?
Green finance is financial investments for projects that support sustainable development. Some examples are water sanitation, biodiversity protection, energy efficiency, renewable energies, climate change adaptation, and more.