In the context of the growing importance of environmental issues and climate change, the global financial system has increasingly come under pressure to shift finance flows from “brown” to “green”. At the same time, governments are promoting the development of green industries in order to meet the targets under the Paris Agreement. Through the development of dedicated financial instruments and innovative financial mechanisms, green finance will help to address negative environmental externalities.
Green finance refers to financial services provided for economic activities that are leading to environment improvement, climate change mitigation and more efficient resource utilization. These economic activities include the financing, operation and risk management for projects in areas such as environmental protection, energy savings, clean energy, green transportation, and green buildings. It is considered as one such instrument that is integrated in policies and strategies aimed at achieving long-term sustainable development in many countries.
Mobilizing financial resources towards environmentally friendly business models and technologies is seen by governments and the private sector as a key factor for the successful transition into “green economy”.
Graph 1 below gives an outline of a green finance system in which the government, the financial sector, DFIs/IFIs and multilateral agencies interact with beneficiaries and technology providers in a unified manner to grow green finance provision.
Graph 1: Green Finance Schematic