Green financing is a term that refers to the use of financial resources to support projects or activities that have a positive environmental and social impact.
Based on a report from the Global Sustainable Investment Alliance, at least $30.7 trillion is invested in sustainable or green investments, up 34% since 2016. These figures show that there is a growing demand and supply of green financing across various sectors.
In this article, we will delve into the intricacies of green financing, exploring its advantages and obstacles, and highlighting instances of successful green finance initiatives globally.
What is green financing?
Green financing is a financial concept that revolves around creating and distributing financial products and services to encourage investments with environmental considerations.
In a broader sense, it signifies financial investments directed towards sustainable development projects, specifically those related to the environment and policies supporting sustainable economic development.
Indonesia banking sector is aggressively advancing sustainable financial initiatives by actively funding climate conservation efforts. This is evident in the substantial credit disbursement volume by national banks, reaching Rp882 trillion in 2021.
Green financing differs from traditional financing methods in several ways, such as:
- It emphasizes the environmental and social outcomes of projects or activities, going beyond mere financial returns.
- It mandates greater transparency and disclosure from issuers and investors regarding the environmental and social performance of their investments.
- Involvement in green financing may carry higher risks and lower returns compared to traditional methods due to less available information about the environmental and social impacts of certain projects or activities.
Types of green financing
Some examples of green financing instruments are as follows:
- Green loans: These loans fund projects or activities with positive environmental or social benefits. For instance, a bank might extend a loan to a solar energy company for installing rooftop solar panels.
- Green bonds: These are debt securities issued by governments, companies, or other entities to gather funds for projects or activities with positive environmental or social benefits.
- Green funds: Investment vehicles that channel funds into assets contributing to positive environmental or social outcomes. An investor, for example, could purchase shares in a green fund specializing in renewable energy companies.
- Green insurance: Insurance coverage protecting against losses or damages arising from natural disasters or climate change events. An insurance company might offer a policy covering crop failure due to drought.
- Green derivatives: Financial contracts deriving their value from assets with positive environmental or social benefits. For instance, a trader might acquire a futures contract related to carbon emissions reduction.
Benefits of green financing
Certainly, engaging in green financing yields various advantages and positive impacts for companies. Some of these advantages include:
1. Cost savings
Operating sustainably not only contributes to environmental well-being but also leads to substantial savings in operational costs. Green financing avenues, such as green loans, offer businesses a chance to secure funds with lower interest rates and extended repayment terms compared to conventional loans.
Furthermore, embracing sustainable practices through green financing helps businesses avoid penalties, sanctions, and legal issues associated with breaching environmental regulations or standards.
2. Environmental impact
Green finance supports businesses in improving their environmental performance. For instance, funds designated for green initiatives can provide financial support to companies adopting eco-friendly technologies or processes.
Green insurance also plays a role in helping businesses safeguard against the effects of climate change, such as natural disasters.
3. Building good reputation
Engaging in green financing allows businesses to showcase their commitment to environmental sustainability and social responsibility. Simple systems like green credit scoring recognize and reward businesses with strong environmental performance.
Certification schemes in green financing also contribute to gaining trust and acknowledgment from stakeholders like customers, suppliers, regulators, and investors who value environmentally friendly practices.
How green financing supports sustainable projects
Money acquired through green financing can be directed towards sustainable projects. The following methods illustrate how this can be achieved:
1. Support the public sector
Utilizing green finance to back public sector endeavors concentrating on sustainability is one avenue. It extends to aiding regulatory enhancements that endorse eco-friendly practices, for example, energy efficiency.
Moreover, it facilitates aligning financial decisions in the public sector with the environmental aspects of the Sustainable Development Goals.
2. Promote public-private partnerships
Green finance can be used to support joint efforts between the public and private sectors, like building environmentally friendly toll roads or power plants driven by renewable energy.
Moreover, it promotes initiatives to share best practices among public and private entities, which could include organizing conferences, workshops, or training programs to improve understanding and involvement in green projects.
3. Community empowerment
Green financing can empower community businesses through microcredit, providing small loans to individuals or small business groups for green initiatives such as organic farming or renewable energy projects.
It also includes offering technical guidance in implementing green technology and sustainable business management, tailored to the needs and potential of local communities.
Several companies that have successfully implemented green financing in Indonesia are:
1. Bank Mandiri
Bank Mandiri is actively creating a range of sustainable offerings, including funding options like sustainability bonds and green bonds, as well as ESG reports. Additionally, the bank is involved in sustainability projects and facilitates consumer credit for the acquisition of solar panel and electric vehicles.
Unilever has committed to investing €1 billion (£900 million) over the next decade in environmental initiatives aimed at enhancing the overall health of the planet.
The allocation of its €1 billion “Climate & Nature Fund” is to support a diverse range of projects, including landscape restoration, carbon capture, wildlife protection, and water preservation. Additionally, the company commits to achieving a “deforestation-free” supply chain within the next three years.
Risks and challenges associated with green finance
Green finance, while contributing to sustainable development, encounters various risks and challenges. These include:
1. Limited number of sustainable projects
The first challenge is the limited number of sustainable projects in Indonesia. This may be due to a lack of awareness or incentives to shift to more environmentally friendly practices in various sectors.
Efforts are needed to increase understanding and support for sustainable projects across sectors. This could include outreach, government incentives, or campaigns highlighting the positive benefits of adopting environmentally friendly practices.
2. Relatively low green financing portfolio
The portfolio dedicated to financing sustainable projects remains relatively small, underscoring the need for further development of financial options that endorse environmentally friendly business practices.
Diversifying and creating more flexible green financial instruments can be the way to fix this. This could involve introducing specialized financing schemes, offering tax incentives, or fostering the growth of greener financial markets.
3. Insufficient supporting data
A lack of adequate data on sustainable projects can be an obstacle in identifying, assessing and monitoring the impact of sustainable business practices.
Companies need to invest more on the collection and distribution of accurate and relevant data on sustainable projects. This will help stakeholders make more informed decisions and support the overall development of green finance.
How to access green finance
To access eco-friendly financing, entrepreneurs can follow these steps:
1. Identify eco-conscious projects
Recognize initiatives that align with the environmental goals of green financing providers or programs. The project should offer clear environmental advantages, such as reducing greenhouse gas emissions, conserving energy, preserving water, or enhancing biodiversity.
2. Develop a project proposal
Articulate the objectives, scope, costs, benefits, risks, and anticipated outcomes of the eco-friendly project. The proposal should also showcase how the project adheres to relevant environmental standards and regulations.
3. Submit an application
Seek a loan or potentially a green bond from a suitable green finance provider or program. The application should encompass details about the company’s financial performance, creditworthiness, and track record in environmental stewardship. Additionally, it should present evidence of the environmental benefits and impacts of the proposed eco-friendly project.
4. Negotiate terms and conditions
Engage in negotiations regarding the terms and conditions of environmentally conscious loans or bonds with the relevant financing provider or program. These terms and conditions may vary based on the nature and scale of the green loan or bond, including:
- Loan or bond amount and duration
- Interest rates and payment schedule
- Utilization of proceeds and allocation criteria
- Reporting requirements and verification methods
- Monitoring and evaluation mechanisms
- Exit strategies and contingency plans
Not only does green financing generate financial gains, but it also provides benefits for our planet. As many companies adopt sustainable financial strategies, the green financing landscape has the potential to play a central role in shaping a more sustainable and environmentally-friendly business environment.
To support your sustainable business projects, not only is green financing necessary, but also suitable digital solutions. Mekari is here to assist you in accelerating processes, providing support in crafting strategies, and facilitating effective execution planning.
Through the adoption of digital technology, you can make a more significant contribution to overall sustainability goals.