Simply speaking, green finance refers to the use of financial products and services, such as loans, insurance, stocks, private equity and bonds in green (or eco-friendly) projects. It has grown by leaps and bounds in recent years, providing public well-being and social equity while reducing environmental risks and improving ecological integrity. And global interest in green energy finance is increasing at a rapid pace—in 2015, investments in green energy reached an all-time high of $298 billion.
Promise and Potential
Environmental sustainability, climate change mitigation, resource conservation and sustainable development play a vital role in access to green finance. “For the green sector to become one of those contributing to economic growth, several enablers need to be in place,” says Ruba Al-Zu’bi, CEO of EDAMA, a Jordanian business association working towards a greener economy. “Green finance is among the most important enablers that would boost innovation and increase the adoption of green solutions and practices across different industrial sectors”, she adds.
During the past few years, green finance has gained increasing relevance, mainly due to the urgency of financing climate change mitigation and adaptation efforts, and the scale of sustainable development projects around the world. The impetus has been provided by three major agreements adopted in 2015: the Paris Agreement on climate change; a new set of 17 sustainable development goals (SDGs); and the ‘financing for development’ package. The implementation of these agreements is strongly dependent on finance and, realizing its importance, the G20 nations established the Green Finance Study Group (GFSG) in February 2016, co-chaired by China and the U.K., with the UNEP serving as secretariat.
According to Sustainable Energy for All, a global initiative launched by the UN Secretary-General Ban-Ki Moon, annual global investments in energy will need to increase from roughly $400 billion at present to $1-1.25 trillion, out of which $40-100 billion annually is needed to achieve universal access to electricity. On the other hand, around $5-7 trillion a year is needed to implement the SDGs globally. Such a massive investment is a big handicap for developing countries as they will face an annual investment gap of $2.5 trillion in infrastructure, clean energy, water, sanitation, and agriculture projects. Green finance is expected to fill this gap by aligning financial systems with the financing needs of a sustainable or low-carbon economy.
Bonding with Green
Green bonds are emerging as an effective way to raise debt capital for green projects. “Green bonds are an exciting trend in green finance and offer potential to mobilize capital for projects that further broader goals around emission reductions and the climate”, says Jeremy Tamanini, Founder of Dual Citizen Inc., the publisher of the Global Green Economy Index. Green bonds are fixed income, liquid financial instruments dedicated exclusively to climate change mitigation and adaption projects, and other environment-friendly activities.
A record $41 billion worth of green bonds were issued in 2015, which is estimated to rise to $80 billion by the end of 2016. Notably, the World Bank issued its first green bond in 2008, and has since issued about $8.5 billion in green bonds in 18 currencies. In addition, the International Finance Corporation issued $3.7 billion, including two $1 billion green bond sales in 2013.
Whether they can plug the gap in investment remains to be seen. According to the International Energy Agency, around $53 trillion of energy investments are required by 2035 to put the world on a two-degree path, as agreed during the historic Paris Climate Conference COP21.
Developments in the Middle East
The Middle East is also making good progress towards green growth and a low-carbon economy. “The latest regional trends highlight the need for green financing mechanisms to support a transition”, says Ruba Al-Zu’bi. “While green may be the obvious feasible and sustainable approach, access to finance makes it more appealing for small and medium enterprises and to individuals to promptly take the right decision”, she explains.
Jordan is one of the earliest proponents of green finance in the Middle East. “Green finance in Jordan is being offered through public channels, such as the Jordan Renewable Energy and Energy Efficiency Fund (JREEEF), commercial banks and micro-finance institutions, as well as International Financial Institutions,” says Ruba. “Most green finance mechanisms are supported by technical assistance, awareness-raising and targeted marketing activities, all of which are crucial to the success of green projects,” she explains.
In the GCC, the National Bank of Abu Dhabi (NBAD) is gearing up to launch a $500 million green bond, the first in the region. This will provide a boost to renewable energy and energy efficiency sectors, and is expected to catalyze sustainable development projects in the GCC. As Jeremy says, “market signals can reinforce policy ones to generate investor enthusiasm for green investing”.
Many developing countries experience hurdles in raising capital for green investment due to a lack of awareness and to the inadequate technical capacities of financial institutions. Many banks, for instance, are not familiar with the earnings and risk structure of green investments, which makes them reluctant to grant the necessary loans or to offer suitable financing products. With the rising popularity of green finance, it is expected that financial institutions will quickly adapt to the funding requirements of environment-friendly projects.
Ultimately, policy interventions for supporting green SMEs, especially in developing nations, are urgently required to overcome major barriers, including knowledge-sharing, raising environmental awareness, enhancing financial support, supporting skill development, improving market access and implementing green taxation.