With the forthcoming Conference of the Parties (COP28) to be hosted by the UAE, focus shifts to the pivotal role of banks in green finance. As the global economy grapples with escalating challenges stemming from natural disasters and climate change, inquiries emerge concerning the obligations of banks in tackling these concerns. These challenges can introduce further strains that undermine financial stability.
Without a doubt, banks assume a pivotal role in mitigating the perils of climate change by steering capital towards eco-friendly products, thereby facilitating the realization of sustainable development objectives.
Understanding green finance
According to the Organization for Economic Co-operation and Development, green finance aims to foster economic growth while simultaneously addressing issues such as pollution, greenhouse gas emissions, waste reduction and the efficient utilization of natural resources.
On the other hand, the G20 defines green finance as the provision of financial resources for environmentally friendly investments that advance sustainable development and yield environmental benefits.
Evolution of the green finance market
In 2008, the World Bank took the pioneering step of launching the first green investment fund, while the European Investment Bank issued the inaugural green bond in July 2007.
Over the past decade, the global green finance market has witnessed substantial growth, driven by the emergence of diverse financial instruments. These include green bonds, unclassified instruments like sukuk, green loans, green investment funds, green insurance and more recent green financial products.
The role of banks
From this perspective, banks wield significant potential to exert a substantial influence on mitigating the risks associated with climate change.
Research underscores the role of specialized financial institutions known as green banks, which are dedicated to expediting the transition to a clean and net-zero energy future.
Green banks
leverage public funds to mobilize private capital, providing financing for a broad spectrum of projects focused on reducing carbon emissions, job creation and community empowerment.
Unlike traditional banks, green banks are typically government-owned or partially publicly owned, established with public funds. While they have a mission-oriented approach, green banks are not charitable organizations and do not engage in philanthropic donations. Their primary function is to act as intermediaries between private capital and the strong public demand for clean energy and sustainable development.
Read more: COP28 UAE TechSprint for sustainable finance against climate change
Compelling reasons for embracing green finance
According to the Arab Monetary Fund, there are several compelling reasons for countries to embrace green finance. One particularly noteworthy reason includes:
· The pursuit of economic growth and the expansion of industrial infrastructure, which can lead to increased environmental pollution levels.
· Uncontrolled urban expansion and population growth in certain regions, resulting in industrial facilities replacing green spaces, contributing to desertification.
· Inequitable deforestation and the reduction of forested areas for industrial purposes, leading to a widespread ecological imbalance crisis.
· Improper disposal of industrial waste, either through burial or intentional release into seas and oceans.
· High carbon emissions resulting from a growing reliance on carbon-based fuels in the industrial sector.
As stated in the paper, integrating green financing into credit decisions and prioritizing funding for environmentally-friendly businesses within an investment framework are essential for enhancing financial stability and promoting sustainable development.
Leading the transition
In a recent update, Mr. Mahmoud Mohieldin, the U.N. special envoy on Financing the 2030 Agenda for Sustainable Development, emphasized the pivotal role of banks in leading the transition to green economies and urged them to actively invest in climate projects.
Mohieldin underscored the significant repercussions of banks’ lack of commitment to economies worldwide, emphasizing the need to involve clients in efforts to decrease emissions. He recognized the increasing integration of climate action in banks’ strategies and commended their progress in incorporating climate commitments into financial operations.
According to Mohieldin, “The role of banks is crucial in fostering investment in energy transformation and directing financing toward mitigating the escalating risks of climate change
faced by developing nations, while also promoting the restoration of natural capital and biodiversity.”
He further added, “The Arab region possesses immense prospects to utilize digital transformation and artificial intelligence as powerful tools in advancing climate action and attaining sustainable development goals.”
Over the past decade, Gulf countries have launched various initiatives to diversify and transition their economies into green economies. These efforts include implementing regional sustainable infrastructure policies, creating an enabling environment for sustainable financing and increasing reliance on renewable energy sources.
Green finance in numbers
Economy Middle East presents the findings of a study conducted by U.K.-based Citibank in collaboration with French-based BNP Paribas that highlights the world’s leading figures in green finance.
Green finance has witnessed remarkable growth in the past decade, rising from $5.2 billion in 2012 to an impressive $540.6 billion in 2021. However, despite this significant increase, green finance still constitutes a relatively small portion of overall funding activity.
· Green bonds continue to hold a prominent position in the field of green finance, accounting for 93.1 percent of total global green finance from 2012 to 2021. The issuance of green bonds has experienced a significant surge, rising from $2.3 billion in 2012 to $511.5 billion in 2021. In cumulative terms, global green bond issuance reached an impressive $1.4 trillion during the 2012-2021 period.
· In recent years, global green lending has experienced substantial growth, starting from 2017, the earliest year with comprehensive data. However, it’s important to recognize that green loan activity, while rapidly expanding, remains relatively limited and predominantly concentrated within the conventional loan market.
· Over the past decade, global green underwriting activity has shown fluctuations in volume and value. Meanwhile, the latter half of the decade experienced a notable increase in the strength of the green private equity market, marked by a substantial presence of pure venture capital activity compared to the earlier half.
· The U.S. and China, as the world’s two largest economies, face accusations of dominating the green finance markets due to the substantial magnitude of their financing offerings.
Promoting global sustainable development
Achieving global sustainable development goals necessitates investments in vital areas such as infrastructure, clean energy, water, sanitation, agriculture, energy-efficient products and other sectors supported by green finance. Therefore, it is essential for banks to establish dedicated systems for financing green projects and introduce specialized banking products that aim to preserve both the environment and humanity.
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