TOP 6 Trends that Shaped Sustainable Finance in 2023
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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 trends in sustainable finance.
What is green finance and why is it important?
Green finance is any financial activity that improves the environment. Such investments may include the purchase of eco-friendly goods and services, the setup of green infrastructure, financing of carbon-neutral manufacturing, etc. With the growing understanding of the disastrous state of the global ecology, such investments are gaining momentum and becoming mainstream, reflecting the human desire to contribute to environmentally positive activities and climate change offset.
The average annual growth of such finance in the world has averaged 230% since 2007. This suggests that the demand for green finance is huge. More than 90% of the demand comes from the USA and European countries.
The governments of many countries and leaders of the largest companies are embracing green finance. Official statistics suggest that in 2019 the green finance market worldwide totaled 528.9 billion dollars. Of these, 167.3 billion were used in 2018.
In Europe and the United States, green finance is a special bond coming with particular privileges and subsidies. They are provided for projects that do not pose a threat to the environmental situation in the world. Thanks to such bonds, the development of environmentally positive projects has become much faster and more efficient. There are a large number of applications of green finance in world practice.
For example, in 2014 in France, a large firm Engie S. A. issued green bonds worth 2.5 billion dollars. The company operates in the gas and energy sectors while its bonds were used to invest in projects in the field of renewable energy sources.
In addition, Toyota, which specializes in the production of cars, issued 1.75 billion dollars of valuable green bonds in 2014. These investments are aimed at financing loans to consumers, which they issue for the purchase of electric cars or cars that have a low level of harmful emissions into the atmosphere, run on biological diesel fuel, etc.
Examples of Green Finance Projects
So, nowadays, green investments and other financial mechanisms allow launching a large number of projects. Such projects are distinguished by environmental safety and energy efficiency; they may cover the following:
- Development of a low carbon economy. This sector covers investing money in the development of environmentally friendly transport (for example, electric cars). It may also include eco-friendlier manufacturing practices and energetics. The leading role in low-carbon economy financing is played by The Green Climate Fund (GCF), a global player with a focus on GHG emission reduction and transition to a low-carbon economy through sustainable land use, public transportation, and energy use practices. Another significant player is The European Investment Bank (EIB); its Green Bond Program specifically addresses the financing of renewable energy projects, energy-efficient infrastructure, and sustainable transportation. Thus, the EIB’s fund was instrumental in attracting private investments for low-carbon projects across Europe.
- Development of renewable energy sources. The most notable contribution to this sphere was made by the International Renewable Energy Agency’s (IRENA) Project Facility, a project providing financial support and technical guidance for projects using solar, wind, hydro, and geothermal power sources. Another notable player in this field is the Clean Energy Investment Initiative (CEII), sponsored by the US International Development Finance Corporation (DFC). This project aims to mobilize private investment in renewable energy sources to achieve sustainable economic growth and clean energy targets in the USA and worldwide.
- Green mortgages. Green mortgages are issued to borrowers on more beneficial terms (with lower interest rates and with government subsidies), provided that the mortgage covers energy-efficient homes built in compliance with carbon-neutral requirements. For instance, in the UK, a nationwide cashback program provides £500 returns for people buying energy-efficient homes (EPC rating of A), and special green mortgages are offered by Barclays, Halifax, NatWest, VirginMoney, and other mortgage brokers.
- Green banking. Financial institutions also go green to raise their rating and customer trust. For example, Amalgamated Bank, a certified B Corp, has a fossil fuel-free portfolio for socially responsible investors. Such banks also provide carbon-neutral accounts with fixed monthly contributions to carbon footprint offsetting.
- Pollution prevention and control. Pollution poses an immense burden on humanity’s efforts to offset climate change and protect the environment. Thus, much effort is directed toward pollution prevention. The best-known green finance projects in this area are The World Bank’s Pollution Management and Environmental Health (PMEH) Program which supports air and water pollution control projects, waste management initiatives, and hazardous chemicals’ responsible disposal in developing countries, and The Asian Development Bank’s Pollution Control and Environmental Sustainability Program. The latter targets pollution issues in Asia and the Pacific and the promotion of green economic growth in the region.
- Circular economy projects. The principle of wise recycling and reuse is behind the circular economy concept, and many green finance actors have embarked on the task of creating truly circular economies to avoid natural resource overuse and curb pollution. Examples of such projects are the Ellen MacArthur Foundation providing financial support and guidance for projects related to resource efficiency and waste reduction. The Closed Loop Fund is another significant actor in this field, granting impact investments to companies working on circular economy solutions in North America. Finally, the Green Investment Group (GIG) is a fund supporting projects on renewable energy installation, recycling facilities’ construction, and sustainable transportation.
- Biodiversity and environment conservation. Following the EU Biodiversity Strategy for 2030, investments in green and blue infrastructure are given national and international priority, with all kinds of solutions for agriculture and forestry, climate change mitigation, and disaster prevention supported through green finance channels.
Why has green finance become so popular?
Green finance is getting to the mainstream of global finance and investment. Here are the causes of this sector’s steady growth:
- Understanding of global environmental problems that lead to climate change. Since the times of the industrial revolution, humankind has exploited the Earth’s resources at an ever-increasing pace, thus leading the planet to a disastrous state of pollution, immense GHG emission rates, and industrial hazards. It is evident that the global population can’t refuse gas, electricity, cars, and other benefits of modern life, but the green projects target making those benefits cleaner and less destructive for the environment.
- Desire to improve the environmental situation in the world. Green finance initiatives are specifically meant to support projects with a positive social and environmental impact, which helps conscious businesses contribute to the improvement of global ecology and human well-being.
- Regulatory pressures. The policy of developed European countries and the EU legislation adopted in the past decade have made eco-friendliness a must rather than a whim. Therefore, businesses of all scales are pressured to transition to cleaner energy sources, adopt greater accountability practices for carbon footprint measurement and reduction, and make their sizable contributions to preserving and restoring the ecology.
- Active UN policy on environmental issues. The SDGs adopted by the UN and endorsed by ann member states are a new challenge to address through communal effort. Sustainability is one of the key SDGs that focus on reducing pollution, adopting clean energy technologies, and abandoning hazardous chemicals from industrial practices. Thus, all work of green finance projects is compliant with SDGs and finds broad technical and financial support at the private and governmental levels.
- Massive adoption of green finance. The main activity in the field of environmental improvement is observed in the developed countries of Europe and the United States. Developing countries are also gradually joining green financing.
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.
Level I of the SFDR legislation was enacted in March 2021; it related to the classification of funds and mandates into three categories pursuant to the SFDR rules:
- Funds that don’t promote environmental, social, or governance (ESG) features (art. 6 of SFDR)
- Financial products that promote ESG features supplementary to other characteristics and follow good governance principles (art. 8 of SFDR)
- Funds focusing on sustainable investment and assigned a reference benchmark (art. 9 of the SFDR)
Level II of SFDR entered into force in January 2023. It refined the classification of features necessary for the financial product to be categorized as a fully sustainable investment. Since that moment, Article 9 companies are only those that set specific CO2 reduction objectives, have positive scores under the SDG Framework, or follow the Paris-aligned Benchmark or a Climate Transition Benchmark.
The data and the forecast for the development of sustainable finance in 2022 highlight the following trends in GreenFi.
TOP Sustainable Finance Trends
#1 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.
#2 Social Impact
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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#3 Production of road transport
Public transportation emits almost 25% of global CO2 emissions, so a low-carbon economy is impossible without low-carbon vehicles, more optimal transportation routes, and greener alternatives for aviation and marine fuel use. It is planned thus to increase funding by 20% for projects aimed at creating environmentally friendly cars. These cars run on electricity, biological diesel fuel or other resources that are distinguished by the minimum emission of harmful substances into the atmosphere. One such green finance initiative was initiated by the UK Coalition for the Decarbonization of Road Transport (CDRT) in 2021. The organization works on financing the purchase and leasing of electric vehicles for public transportation, conducts research on unblocking the barriers to EV-based public transportation network creation, and seeks finance for scaling the battery technology adoption in public transportation.
#4 Solar energy
Renewable energy is one of the hottest sustainable finance trends, as energy is needed at a growing scale across the world. So, long-term success in attaining sustainable development is directly related to finding safe, eco-friendly energy sources, solar energy included. The investments will be directed at creating and maintaining existing plants that process solar energy. This will save money and preserve the environment from harmful production products.
Solar energy development initiatives are being launched across the globe right now, attracting investor finance to speed up the transition to a low-carbon economy. The EU currently finances many solar energy projects, including the PERTPV project using perovskite-based materials for next-gen solar cell production. There is an EU solar energy strategy adopted in May 2022, guiding the EU businesses and investors on the way to solar energy technology deployment and solar energy goals. The largest solar energy initiatives in the EU are the European Solar Rooftops Initiative, the EU large-scale skills partnership, and the EU Solar PV Industry Alliance.
#5 Environmentally organic products
Both green finance trends and financial regulation prospects urge companies, countries and people to abandon environmentally hazardous products. For example, they give up plastic bottles, bags, batteries, etc. Instead, they use safe products that quickly decompose in natural conditions and do not release toxic substances into the soil, water or atmosphere.
Today, edible glasses and plates are popular, which are made of pressed fruits and vegetables, textile bags and bags, which are great for everyday use and can withstand quite heavy loads. Thus, initiatives financing the transition to organic food and farming are also becoming more commonplace globally. For instance, the UK-based Triodos Bank finances organic agriculture projects because they don’t involve using hydrogenated fats and risky additives, thus contributing to human health and animal welfare. However, this sector is still largely underrepresented in green finance; according to Latin America’s Climate Bonds Initiative (CBI) representatives, agriculture, food, and forestry bonds take up only under 3% of CBI’s issued bonds. Thus, a greater focus on organic agriculture initiatives is needed to promote this industry.
The climate finance trends are mainly focused on the development of environmental safety in the energy, oil, and gas sectors. These main environmental pollutants must be optimized to prevent an environmental disaster. Governments, NGOs, and international funds also place green bonds to reduce the harmful impact on the environment. The EU voiced its commitment to mobilize state aid and sovereign funds for renewable energy companies in January 2023 as part of realizing its new Net-Zero Industry Act. The initiative was explained by the EU’s drive to keep European firms from relocating to the USA, where renewable energy projects find more tangible support and endorsement. The most popular aspects of focus are LED lighting, e-bikes and cargo bikes, biomass boilers, electric charging points, on-shore wind turbines, air source heat pumps, anaerobic digestion projects, solar panels, and EVs.
Read also: Blockchain in renewable energy
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.
Why is impact investing gaining momentum?
Impact investing is more than an expectation of a healthy ROI; it is one of the trending green finance trends promising both reasonable financial returns and a positive social and environmental impact for the investor. Individuals and large funds showcase increased trust in impact investing because of the investment projects’ combined financial and sustainability value. Besides getting financial revenue, investors are attracted by an ability to contribute to resolving pressing global issues, such as sustainable agriculture, alleviation of poverty, conservation of the environment, healthcare, affordable housing, and the like.
How are regulations and reporting frameworks strengthening in sustainable finance?
There is a rigorous legal framework for disclosures relating to sustainable investments and sustainability risks; the European Commission adopted an action plan on financing sustainable growth in 2018, introducing considerable amendments to the prior Directive 2016/2341. Disclosure of sustainability-related information is also regulated by the Sustainable Finance Disclosures Regulation (SFDR), which operates together with the Complementary Climate Delegated Act (CDA) to increase transparency about financial products’ sustainability.
How do investor activism and engagement contribute to sustainable finance?
Investors are direct contributors to their financed projects’ sustainability profile, as investor trust and belief in the project’s long-term prospects and value determine its success. This way, investors owning a large share of any business can influence the company’s decisions related to sustainability considerations and increase the company’s dedication to sustainability goals and initiatives.