Green Finance: Sustainability, Green Bonds, and Future Directions

The Sustainability Landscape

The concept of sustainability has gained considerable popularity in recent decades. Sustainability generally refers to the continued existence of systems and processes. Traditionally, sustainability was discussed mainly in the context of ecology and biological systems, but today the concept has extended to virtually every discipline, including management, economics, business, politics, and culture. The increasing attention on sustainability has largely been driven by the dangers posed by human activities on the environment. For instance, the use of fossil fuels depletes the ozone layer, which in turn causes climate change. Nonetheless, from what has been achieved so far, it is evident that sustainable development is a realizable endeavor (Bowdin et al., 2011). Sustainable development refers to a roadmap for attaining sustainability in any process or activity that utilizes resources — it is development that fulfills present needs without diminishing the capacity of future generations to fulfill their own needs.

Organizational sustainability involves maintaining the ability to keep a business operational while addressing the needs of current consumers and taking into consideration the needs of future generations. It encompasses the creation of enduring value through the long-term preservation and enhancement of financial, environmental, and social capital. Trends such as demographic change, globalization, climate change, and social inequity have posed major challenges to the conventional business model with its emphasis on shareholder value. Corporate scandals and financial crises have led to a significant loss of public trust in business. As a result, corporations face growing pressure from consumers, investors, employees, and governments to demonstrate that they are adopting ethical and sustainable practices (Wales, 2013). Significant issues and current dilemmas in the field of sustainability include the status of regional ties — such as Brexit — climate change, corporate governance, big data, and the ways in which the Sustainable Development Goals (SDGs) are reshaping corporate reporting (Slavin, 2016).

Green Finance: Background and Global Context

One of the key topics in sustainability today is green finance. The growing scientific evidence supporting the reality of climate change and the role of human activity in greenhouse gas emissions has elevated this issue to a central place on the global agenda. Nations have agreed to restrict average temperature warming to 2 degrees Celsius — the threshold beyond which hazardous climate change is projected. Numerous countries, including China, have voluntarily committed to decreasing or restricting their carbon emissions by 2020. In this regard, China has been substantially scaling up its green technology and renewable energy sectors. Financing is a fundamental enabler of these frequently large, capital-intensive projects, and banks in the nation continue to play a vital role in helping China fulfill its pledges to reduce carbon intensity by 40 to 50 percent by 2020. This has given rise to China's leadership in green finance.

Green finance is defined as financial products and services that incorporate environmental considerations throughout the loan decision-making process, ex-post monitoring, and risk management procedures — all aimed at promoting environmentally responsible investments and encouraging low-carbon technologies, projects, industries, and businesses (PricewaterhouseCoopers, 2013).

Banks in China have made notable advances in the area of green finance. The trend toward increased lending to green sectors and declining lending to energy-intensive, high-pollution industries indicates that green finance is progressing in China. Leading corporations in the Chinese banking sector view green finance as a promising area for long-term profitable growth, seeing it as an opportunity to diversify services and gain a competitive advantage over rivals that act more slowly (PricewaterhouseCoopers, 2013).

In a recent year, the issuance of green bonds rose sharply by 120 percent to a total of $93.4 billion globally, with this figure projected to more than double the following year to approximately $206 billion. Issuers from China constituted more than 30 percent of the entire global volume in 2016 as the nation moved quickly to scale up its green investment. Demand from China is projected to grow further in the coming years, in part due to the accumulated consequences of pollution from its rapid industrial growth. Green finance also received major support from the 2015 Paris Agreement, which was adopted by approximately 200 countries and commits signatories to a transition toward renewable energy by 2050 (Moskowitz, 2017).

Current Theories and Areas of Debate

A key area of debate concerns the actual measurement of environmental impact. With respect to green finance, there remains ambiguity in assessing environmental outcomes. There is contention over how the environmental benefits of an investment project can be examined and appraised — whether through standardized measurement tools or through project-specific assessment, taking into account that every project is financed differently. It is important to note that every green bond issuance is distinct, and therefore environmental impact will most likely be measured through projections and anticipated outcomes of the project, its implementation, and its results (Revelli, 2017).

The effort required to issue a green bond often leads issuers to seek additional remuneration from investors to cover these costs. Pricing is also complex because investors are not always willing to pay a premium for a project that could have been financed by a conventional bond. This can generate a disparity between supply and demand. However, as is the case with responsible equity investment, green investors in the bond market are frequently willing to pay more, since price is not always their primary concern (Revelli, 2017).

Another area of concern in green finance is greenwashing — the practice whereby a corporation or issuer overstates its environmental credentials. Although a set of Green Bond Principles was introduced in 2014 to encourage transparency, disclosure, and integrity in the market, considerable additional effort is required to safeguard the industry's reputation. The issue of disclosure highlights a key dimension of corporate social responsibility (CSR): transparency and accountability. The notion of transparency requires that business organizations truthfully disclose their strategy, practices, policies, governance measures, and ethical standards. Organizations must also disclose how their operations affect society, the economy, and the environment — whether positively or negatively. Transparency and CSR are inseparable. Complete transparency, however, has yet to be achieved. It is common for organizations to conceal negative aspects of their operations in order to protect their reputation (Idowu and Filho, 2009). Achieving genuine transparency is vital because it is only through this kind of integrity that sustainable finance can fully realize its potential. Without the ability for investors and stakeholders to readily identify high-quality environmental projects, it becomes more difficult for the industry to build the trustworthiness it needs (Nassif, 2017).

References

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Idowu, S., & Filho, W. (2009). Global practices of corporate social responsibility. Springer.

Moskowitz, D. (2017). Green bonds: The benefits and risks. Investopedia. Retrieved from http://www.investopedia.com/articles/investing/081115/green-bonds-benefits-and-risks.asp

Nassif, K. (2017). Great and growing potential in green finance. The National. Retrieved from https://www.thenational.ae/business/markets/great-and-growing-potential-in-green-finance-1.26735

PricewaterhouseCoopers. (2013). Exploring green finance incentives in China. Retrieved from https://www.pwchk.com/en/migration/pdf/green-finance-incentives-oct2013-eng.pdf

Revelli, C. (2017). Responsible green finance: Can investors make a real social impact? The Conversation. Retrieved from https://theconversation.com/responsible-green-finance-can-investors-make-a-real-social-impact-71970

Robins, N. (2017). 2017: What next for green finance? Huffington Post. Retrieved from https://www.huffingtonpost.com/nick-robins/2017-what-next-for-green_b_14203706.html

Slavin, T. (2016). The top 10 issues for sustainability in 2016. Ethical Corporation. Retrieved from http://www.ethicalcorp.com/top-10-issues-sustainability-2016

Szymanski, M. (2016). Developing countries show world way forward on green finance. UNEP News Centre. Retrieved from http://www.unep.org/newscentre/developing-countries-show-world-way-forward-green-finance

Wales, T. (2013). Organizational sustainability: What is it, and why does it matter? Review of Enterprise and Management Studies, 1(1), 38–49.

Zheng, Z. (2015). Demand for green finance in greening China's financial system. UNEP. Retrieved from