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Green Finance to Fuel Sustainable Development

Nations around the world have taken action to address climate change. The Paris Agreement adopted in 2015 set goals for participating member states to reduce their impact on climate change and keep global temperatures below a certain threshold. ((Sustainable Development Goals, United Nations, http://www.un.org/sustainabledevelopment/climatechange/ (last visited Nov. 28, 2017).)) Governments have enacted various regulations taking environmental effects into account, such as the Clean Air Act and the National Environmental Policy Act in the United States. Market-based solutions to climate change, such as cap-and-trade and carbon pricing, have also proven to be effective. Alongside governmental action, the private sector seems to be playing a role in tackling the climate change problem as well, as evidenced by the emergence of green finance.

Green finance can be defined as the “financing of investments that provide environmental benefits in the broader context of environmentally sustainable development.” ((Maxim Kobzev & Tallat Hussain, Green finance: Legal Frameworks and International Practice, White & Case (Oct. 2017), https://www.whitecase.com/sites/whitecase/files/files/download/publications/green-finance-legal-frameworks-international-practice.pdf.)) Far from obscure, the green finance market continues to grow. The 2016 green bond market saw over $81 billion in issuance, and it is estimated that there will be $103.3 billion issued by the end of 2017. ((Nick Robins, 2017: What Next for Green Finance?, Huffington Post (Jan. 16, 2017, 12:39 PM), https://www.huffingtonpost.com/nick-robins/2017-what-next-for-green_b_14203706.html; Climate Bonds Initiative, https://www.climatebonds.net/(last visited Nov. 28, 2017).)) Major investors have made “public commitments to climate and responsible investment,” and their appetite for green bonds results in most issuances being oversubscribed. ((Investor Appetite, Climate Bonds Initiative, https://www.climatebonds.net/market/investor-appetite (last visited Nov. 28, 2017).)) Furthermore, corporate lenders are increasingly turning to “use of proceeds” clauses to specify what a given loan is for, indicating concerns over social utility. ((Roger Gifford, Green Finance Will Soon Become a Thing of the Past, GreenBiz (Nov. 16, 2017, 12:47 AM), https://www.greenbiz.com/article/green-finance-will-soon-become-thing-past.)) Indeed, these trends indicate a willingness on the part of investors to engage in transactions resulting in capital being used to fund environmentally responsible projects.

Perhaps noticing the amount of investment activity in the green finance arena, governments around the world have begun to strengthen investment infrastructure to facilitate these transactions. According to a U.N. study, by mid-2016 approximately sixty countries implemented 217 measures to support the green finance ecosystem. ((U.N. Env’t Program, The Financial System We Need: From Momentum to Transformation 10 (2016), http://unepinquiry.org/wp-content/uploads/2016/09/The_Financial_System_We_Need_From_Momentum_to_Transformation.pdf.)) Measures include promoting capital reallocation, improvement of risk management, enhancement of reporting, and clarifying responsibilities of financial institutions. ((Id.)) Developing and developed economies alike, many of which are major contributors to climate change, have enacted measures identified in the aforementioned study. For example, China pushed to establish a green financial system when it introduced a “comprehensive set of guidelines” for banking, capital markets, and insurance, while India has placed requirements on green bonds to “boost financing, particularly for renewable energy.” ((Id.)) Global regulatory schemes such as those in China and India may increase investor confidence in green financial markets and further expand the amount of capital used for climate-friendly initiatives.

Why are we seeing this increase in green finance transactions and general interest in the topic? One answer may be climate risk mitigation. ((Gifford, supra note 5.)) As global temperatures rise, storms are becoming more severe, the occurrence of droughts more frequent, and coastlines are slowly being eroded. ((The Consequences of Climate Change, NASA, https://climate.nasa.gov/effects/ (last visited Nov. 28, 2017).)) This will certainly affect infrastructure and likely disrupt the usual operation of the economy as a whole. It would seem to be sound business judgment to invest in projects geared towards mitigating the effects of climate change to avoid adverse economic effects in the long run.

Based on the recent growth of green finance, notably through green bond issuance, it appears that the green finance market will become ever more robust as time moves forward. To facilitate this growth, governments worldwide are enacting measures to help stimulate this market. While some may question the value of climate risk mitigation at this stage, it seems to be satisfying investor demand and promoting a cleaner world in the long run.

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Coral O'Connor

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