Finance has often appeared synonymous with corporate city workers, big banks, and indistinguishable faces in boardrooms. However, the impending threat of the climate crisis has compelled even the most unlikely actors to reconsider their role in contributing to climate change. Given that climate change was spoken about for a record-breaking ten minutes in the recent US presidential debate, it suggests the imminent importance of ‘green finance’ on a global scale — something that people are beginning to appreciate more every day.
Although there is no set definition for green finance (and no, it does not refer to ‘hedge’ funds), it broadly encompasses the:
‘activities related to the two-way interaction between the environment, and finance and investment’.
Green finance also seeks to ensure that financial investments and policies contribute to a wider goal of sustainable development. Unfortunately, sustainable development does not come cheap, and these financial investments need to be sourced somehow; the role of the private sector has therefore been vital in funding sustainability projects and supporting developing countries to help them reach net-zero.
How can the private sector help?
It is no secret that corporations have been overwhelmingly answerable for carbon emissions and outputs. In fact, since 1988, 100 corporations have been responsible for 70 per cent of greenhouse emissions. Therefore, their role in green finance should be one stemming from accountability, rather than corporate choice.
However, it is promising that certain measures are being popularised to work towards reducing this gargantuan footprint. One of the ways this can be done is through ‘green bonds’. Simply speaking, this refers to bonds (essentially, loans made to large organisations) created to fund projects that have positive environmental benefits. Many familiar faces are involved in the green bond market, which in itself is a growing industry, such as Apple, Vodafone, Unilever and Pepsi.
Moreover, the UK has set itself a target to ‘reduce the UK’s net emissions of greenhouse gases by 100% relative to 1990 levels by 2050’. However, this is projected to cost 1-2 per cent of the UK’s GDP. The pandemic-inflicted recession has weakened the prospect of government contributions to this goal, but this target is set to be financed predominantly by businesses. This pledge has been made in writing, on behalf of the Committee on Climate Change, so it also offers some solace that businesses will be held to account on their green initiatives.
Yet as we know, climate change is set to hit the Global South in a more debilitating way. Although many developing countries have outlined goals to limit their greenhouse emissions, they also need new investments of up to $300 billion annually to work towards this. Private financial institutions have the capacity to deliver these, in order to aid development projects in the Global South. And what’s in it for them? Apart from mitigating the damaging effects of extractivism (which many of them do also contribute to), it helps to ensure that markets are viable in the long run.
How can the public sector help?
An equally important body, the public sector, has just as much to answer for in the formation of green financial policy. Donald Trump leaving the Paris Agreement in 2019 was a good example of how government inaction can be just as detrimental as corporate-induced emissions. Surprisingly, climate policy received a rare spotlight in the history of US presidential debates — although Trump’s suggestion to ‘plant trees’ cannot be classed as long-term green policy. Nevertheless, it points to the importance of government policy in shaping attitudes towards climate change.
With the UK leading the Conference of Parties 26 (COP26) next year, the government has worked to mobilise the public sector to contribute to a green economic recovery. One of the main priorities set has been a focus on the renewable energy sector. Recently, Boris Johnson announced plans to make the UK ‘the world leader in clean energy’, by uncovering a plan to power all UK homes with wind energy by 2030. Offering a substantial investment of £160 million to manufacture turbines, this move is a shift from previously ambiguous attitudes to climate policy on behalf of the government.
Furthermore, the wide-ranging role of the public sector in green finance can be outlined in the government’s ‘green recommendations’, which focus on sectors such as housing, green transport, and even afforestation (which is notably a more coherent strategy than just ‘planting trees’). This has ranged from strategies to ‘end the sale of new conventional petrol and diesel cars and vans by 2040’, ‘aspire for as many homes to be EPC Band C by 2035’ and introduce, ‘a voluntary public sector target of 30% reduction in carbon emissions by 2021’. While these policies are domestic, the upcoming COP26 also offers a chance for the UK to set an international precedent on the issue.
A post-pandemic opportunity?
This pandemic has certainly prompted an atmosphere of alarmism, and along with it, the future of the planet has been a key concern. With the temporary shut down of industrial sectors due to lockdown measures, we got a glimpse of a decarbonised world. Green finance is therefore a means to amalgamate two previously resisting sectors — the public and private — to work towards creating a tangible difference.