Green Finance: Key Trends 2022
Green Finance is the buzzword in the world of modern finance. With the total number of assets in green bond ETFs USD 1.75 billion at the H1 of 2022 and an expectation of market growth of $2.36 trillion by 2023, it has become one of the popular investments. The sector has attracted many institutional and retail investors in the USA, EU, and China, as it offers many use cases in many sectors, from governmental operations to manufacturing.
So, what exactly is Green Finance, and what use cases are the most prominent? Here is a quick intro to the industry, with a review of its most promising applications.
Growing Role of Green Finance
Green Finance is any structured financial activity to improve the environment. It covers the protection and restoration of biodiversity, climate change mitigation, sustainable use of natural resources, pollution prevention, as well as the reduction of CO2 emissions. What used to be a voluntary contribution to environmental protection is now becoming law. For instance, the EU passed the EU taxonomy regulation and the Sustainable Finance Disclosure Regulation (SFDR) following the Green Deal adoption in 2019. Other policy regulations in the EU included TNFD, ISSB, and others. These documents aim to reach the goal of a climate-neutral economy in the EU by 2050 and apply to companies that started their operations in 2022.
This legislation laid the basis for the EU green finance strategy for 2022 and the upcoming years, integrating environmental concerns into various business sectors and introducing new economic growth opportunities. The regulations and standards are supported by an investment plan of €1 trillion over the next decade. There is an obvious trend to prove the statistics of the green bonds investments to be mostly in the EUR or USD; you can see the graphs below.
The data and the forecast for the development of sustainable finance in 2022 highlight the following trends in GreenFi.
CO2 Footprint Offsetting and Carbon Trading
The need to cut CO2 emissions and strive for carbon-neutral operations is currently at the top of research interest, so businesses are increasingly pressured to transition to net zero in their operations.
There are two popular ways to get a carbon credit – to leverage the carbon trading market or to cut off emissions. Many manufacturers use current resources of emission allowances as a quick way to reach emission reduction targets. It is quite a popular niche. Many existing solutions generate revenue from CO2 carbon credit trading, and the industry is expected to grow.
Carbon offsetting compensates CO2 emissions by reducing them elsewhere (for example, via investments in rural land protection). In most cases, companies combine CO2 carbon credit trading and offsetting to reach the CO2 emission targets and implement their zero-carbon strategies. Some businesses have even managed to become climate-positive, removing more CO2 from the atmosphere than they emit during their operations.
The concept of sustainability in business has transformed in recent years, as sustainability concerns pressure businesses to evolve and adapt. Thus, GreenFi is no longer related exclusively to CO2 offsetting. Now it also includes the Environmental, Social, and Governance (ESG) projects that have attracted over $649 million in financing by the end of 2021 (a 20% increase compared to 2020). Thus, the ESG market is expected to grow as stakeholders recognize the social value and opportunities around sustainable GreenFi projects. Besides, businesses experience rising pressure from investors to attain ESG goals and deliver top-level ESG performance.
4IRE has also joined the ESG market by contributing to the realization of the green debt management platform supported by SEB bank, Government Authorities in Sweden and Germany, Öhman, the Stockholm Sustainable Finance Center, GIZ, CICERO (Center for International Climate Research and the leading global provider of Second Opinions on green bonds). More information on this initiative is provided in our case study about Green Asset Wallet here.
ESG projects are gaining momentum in the business world, and their social component stands out as an important contributor to sustainability. The social dimension of ESG is expected to affect employee engagement, as employees are interested in working with sustainable companies and as an opportunity to contribute to the ESG sphere. Thus, environmentally conscious specialists might decide to leave the company or reject a business offer if they see the potential employer doesn’t do enough in the ESG dimension or postpones this strategy’s implementation. As a result, companies with poor ESG parameters may find it hard to attract and retain talent.
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Your GreenFi Toolkit for Joining the Green Finance
So, how can a business or individual join the green finance sector and make a sizable contribution to it? There are several green fund types to consider.
- Green bonds. This type of bond is meant to finance environmental or climate-related projects, such as renewable energy, energy efficiency, biodiversity, carbon-neutral transportation, water management, etc. As of 2019, the green bonds market exceeded $258 million. The flagship green bonds are EIB’s Climate Awareness Bond (2007) and World Bank’s green bond (2008).
- Sustainability bonds. These bonds are allocated to financing mixed green and social projects. In most cases, these bonds finance SDG-compliant projects (UN’s sustainable development goals). This bond type includes corporate and financial SDG bonds, asset-backed SDG bonds, sovereign SDG bonds, and municipal SDG bonds.
- Sustainability-linked bonds. This innovative bond category has a fluctuating coupon rate depending on the issuer’s attainment of sustainability goals. The first bond of this type was issued by an Italy-based energy company ENEL in 2019; the ECB issued another SDG-linked bond in 2021, making it eligible for asset purchase programs and use as collateral.
- Green loans. These loans are disbursed to projects specializing in green issues, such as climate change, natural resource protection, biodiversity protection, etc. The loan is provided on privileged terms, and the borrower has to report their progress on a regular basis.
- Sustainability-linked loans. This loan type is a regular loan (it is given to companies not related to green projects), but the premium a borrower should pay to the lender fluctuates depending on the borrower’s attainment of ESG targets. In other words, if the borrower successfully progresses toward ESG fulfillment, they pay a lower or zero interest rate. The interest rate rises respectively if the borrower fails on the ESG pathway.
- Blue bonds. These bonds are provided by governments and development banks to finance marine and ocean-related environmental projects and initiatives. The first bond of this kind was the 2018 Seychelles Blue Bond, used to support businesses working on marine area protection and responsible fishery governance. This GreenFi area has enormous potential, with a growth forecast of $3 trillion by 2030.
- Social bonds. As their name suggests, these bonds support social projects targeting food security, natural disaster relief, unemployment, and vulnerable populations. This bond type is still in the germinal stage of development, but investors express interest in this financial instrument, as the demand for EU SURE social bonds’ emission in 2020 showed.
How to Scale the GreenFi Up?
The COVID-19 pandemic slowed down the GreenFi sector’s development but highlighted the most significant priorities in this area. To move GreenFi to the next level and achieve genuine international adoption, policymakers and startups need better standardization and transparency in GreenFi operations. This change is possible with the harmonization of green investment taxonomies, definitions, and regulations. The outcome can’t be attained without international cooperation, consistent GreenFi instrument labeling, and rigorous risk assessment and tracking.
Digital Boosters of GreenFi
Digitization and fast technological progress can also benefit the dissemination of GreenFi. Various modern trends, such as the increasing use of big data, artificial intelligence, and machine learning, help forward-looking businesses capture and analyze vital financial data for their product development. The emerging blockchain technology is also of value for the GreenFi industry, as it reduces the cost of green bond issuance and increases the green bond distribution transparency, thus giving investors more confidence about investment in green projects. Thus, GreenFi startups can take combined advantage of Millennial and Gen Z environmental concerns and digital device use to promote GreenFi investments via digital channels.
Start Your Journey to GreenFi
As you can see, green finance is no longer a part of the distant future. Instead, it is a realistic business pressure today, and companies must comply with the EU legal framework and ESG criteria to survive and enjoy customer trust.
There is a great future and perspective in the development of sustainable finance. This proves that society is eager for environment-friendly solutions to contribute to ESG progress. To achieve this, you may consult software development service providers with strong expertise in Green Finance, DeFi, and Blockchain. The best practice on the market shows that the combination of blockchain technologies and decentralized finance help to reach the goal with transparency and accountability.
4IRE supports this striving to bring more value through software development and offers in-depth expertise in providing Green Finance Development solutions and services. Working with us on your GreenFi transition is always a sure way to improve your operations’ sustainability. Let’s make the step toward eco-friendly, green finance together.