Is the move to financing green here to stay? How can we avoid it just being a fashionable trend? Dr Jeremy Gorelick, of the Green Finance Institute, argues for the need to consider a comprehensive toolkit of green finance instruments and context-appropriate financial interventions for countries to build a sustainable future over the long term.
In today’s financial discussions around the world, green is the colour of choice: green banks, the green bond market, green investments and green finance instruments are heralded to drive the delivery of clean growth, resilience and environmental ambitions. Policy advisors and investors alike stress that a post-COVID economic recovery must be green and resilient, and would be greatly enhanced if all financial decisions take climate change and environmental impacts into account.
From The Green Bank Network’s discussion on the potential of green banks to lead the charge on economic recovery, to the US$1 billion pledge from the Rockefeller Foundation for a ‘green’ and ‘inclusive’ COVID-19 recovery, a wide range of organisations have recently hosted fora and made fresh pledges to accelerate capital flows towards green projects.
During the Green Horizons Summit held in November 2020, Mark Carney, the UK Prime Minister’s Finance Advisor for COP26 and UN Special Envoy for Climate Action and Finance, insisted that ‘achieving net zero will require a whole economy transition, involving every company, bank, insurer and investor, and creating the greatest commercial opportunity of our time’. Part of that transition will require a re-skilling of both policy makers and the financial sector to ensure that they incorporate green considerations into their decision making. Clearly, institutions like green banks can also be a vital part of that evolution, particularly in countries whose financial ecosystems do not prioritise green projects.
What's a green bank?
According to the State of Green Banks 2020, a green bank can take several forms, but all green banks are motivated by a public purpose: accelerating low-carbon, climate-resilient, and sustainable development. A green bank is most often a publicly owned, commercially operated, specialised financing institution or facility that acts as a focal point for scaling up domestic investment in climate-friendly, sustainable projects.
Within this context, green banks are one of the most frequently championed institutions to facilitate this green finance revolution. But some argue that green banks should be only one of many tools considered by countries around the world in their exploration of green solutions. Thus, the question remains: how can countries, particularly those in fast-growing economies, be confident that their proposed combination of tools for prioritising, and subsequently, financing green projects fit their specific plans and needs?
Green banks can be a solution, but not always the solution
Around the world, countries and cities are increasingly embracing green banks as a vehicle to catalyse financial flows for climate-smart infrastructure projects. The recently launched State of Green Banks 2020 stocktake of these vehicles, analyses 27 operational green banks across 12 countries and highlights their accomplishments and potential in nascent markets.
Where in the world are green banks?
OECD (Organisation for Economic Co-operation and Development) member countries host many successful bespoke green investment banks as standalone institutions, with the UK’s Green Investment Bank (see below) the most often-cited at the sovereign level.
However, green banks are not always the answer and economies in transition embrace a diversity of approaches (often driven by development banks). According to some officials, green banks are either too complicated or too expensive to design or capitalise, while others argue that they would like to encourage the private sector to find a market solution rather than rely on a new public institution for funding flows. In parts of the global south, governments have either created a climate division, as in the case of the Climate Finance Facility of the Development Bank of Southern Africa, or mainstreamed green considerations into investment decisions in tandem with infrastructure (particularly power and transport) as championed by the Inter-American Development Bank across Latin America.
In essence, when it comes to financing green, it would be misleading to consider a ‘one size fits all’ approach. This is because reliance on only one solution fails to incorporate the different types of finance (grants, debt and equity) and risk appetites of both seekers and sources of capital. C40’s report on Establishing a City Green Bank, (which examines green banks at the sub-national level), further highlights that city green banks are largely concentrated in North America rather than more widely dispersed around the world. Although driven by a number of factors (including constitutional considerations and the enabling environment), the proliferation of city green banks in certain jurisdictions means that green banks may be appropriate in some, but not all contexts.
Can green banks deliver environmental impact and healthy profits?
Yes they can. Established in 2012, the UK Green Investment Bank (GIB), has been identified as one of the most successful green finance institutions, attracting £2.50 of private investment for every £1 of public resources, and supporting 100 projects worth over £12 billion whilst committing £3.4 billion of its own capital. This was largely achieved through the premise that green banks can fill market gaps where critically important climate investments lack the scale, financial returns, or maturity for commercial financing. The UK GIB was sold to a private entity in 2017 for £1.6 billion, reducing public sector debt by that same amount.
Could a more inclusive toolbox of ‘green finance’ instruments support the pathway to economic recovery?
Countries around the world are scrambling to design economic recovery plans and many are incorporating provisions to fight climate change. An example of this is the US$900 billion stimulus package passed in the US in December 2020, which includes provisions to fight climate change such as significant investments into renewable energy and energy storage. The pandemic recovery response provides an important opportunity for governments to look at the gaps and obstacles preventing the easy flow of capital from the financial sector –(in tandem with government funds) to sponsors of green projects.
Arguably, green finance goals will be best achieved through a combination of financial instruments and innovations, rather than a single approach which might be ultimately inappropriate to a country’s context. Effectively, green banks can be a meaningful part of a multi-pronged response to economic recovery today, but cannot replace the need to socialise and integrate green finance concepts into the entirety of the financial sector.
Further, repeating the mantra that green finance will necessarily pave the road to economic recovery is not enough. Countries around the world need to decide how to best implement a tailored green recovery which maximises their own national potential for clean, inclusive, and resilient growth. These country-specific recoveries must lay the foundation for future development that is both sustainable and embedded within local institutions.
UK Partnering for Accelerated Climate Transitions (UK PACT) is well-positioned to help partner governments to think through the best ways to green their financial ecosystems and introduce locally-relevant institutions, tools and instruments. The programme supports partner countries to accelerate their clean growth transitions in bespoke ways that align with their government’s own priorities and demand.
Thus, while green might be the new black, the greening of the financial sector has the best chance of permanence if it can avoid being a fashionable trend. It should instead be part of a well-coordinated approach to full institutionalisation across a wide range of stakeholders willing to contribute funding for both technical assistance and capital investments.
Dr Jeremy Gorelick serves as Strategic Advisor for the Green Finance Institute with a focus on finding creative ways to fund green initiatives at the sub-national level. He received his doctorate from the University of Cape Town, writing a dissertation on financial innovations in sub-national finance and has lectured at Johns Hopkins University since 2010. Over the past twenty years, he has been responsible for raising over US$1 billion for infrastructure projects on behalf of public entities.
The views expressed in this blog are the author’s own personal views, not an official position of UK PACT.