On November 9, 2020, the World Economic Forum published an article titled “What is Green Finance and Why is it Important?”, exploring the concept of green finance and its growing role in the global economy. Green finance encompasses any structured financial activity—product or service—designed to achieve a better environmental outcome. This includes a range of loans, debt mechanisms, and investments aimed at promoting the development of green projects, minimizing the climate impact of traditional projects, or a combination of both.
Typical projects under green finance include renewable energy and energy efficiency, pollution prevention and control, biodiversity conservation, circular economy initiatives, and the sustainable use of natural resources and land. A common green financial instrument is the green bond, which must meet specific criteria regarding the use of proceeds, the project evaluation and selection process, fund management, and detailed reporting. The United States, China, and France are the top three issuers of green bonds.
The article also highlights the growing involvement of central banks in green finance. For example, the European Central Bank holds about 20% of all euro-denominated green bonds, despite only starting to purchase corporate bonds in 2016. Additionally, Sweden’s Riksbank has begun divesting from fossil fuel-related assets, selling bonds from certain Australian and Canadian provinces.
Green finance represents a growing opportunity for investors looking to align their portfolios with sustainability goals while seeking competitive financial returns. Green bonds, in particular, provide a way to finance eco-friendly projects while diversifying investments. However, conducting due diligence is crucial to ensure that funds are used in line with stated environmental objectives, thereby avoiding the risk of greenwashing. Investors should also monitor central bank and government policies on green finance, as these can influence opportunities and potential returns in this sector.
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