What is green finance and how does it work?

(© Shutterstock)

(© Shutterstock)

Investments and loans that specifically fund enterprises that protect the environment and conserve natural resources are green financing tools.

Renewable energy and energy-efficiency projects that reduce harmful greenhouse gas pollution are examples of ventures that may attract green funding. Similarly, waste-management programs that capture and use landfill gas can qualify for green financing.

Green finance also makes it easier for consumers to adopt clean-energy technologies. Homeowners may receive loans to install rooftop solar panels — possibly installed by businesses whose startup funding came from green banks.

Why green finance?

Financing for clean energy is a nontraditional approach that arose from concerns about preserving clean air, water and natural resources for future generations.

Although some commercial lending institutions now offer financing for energy-efficient homes and businesses, the phenomenon of green financing is relatively new. It has developed alongside increased demand for clean energy, especially from consumers who want clean energy resources in their homes or neighborhoods. These are often small projects that larger banks have, for various reasons, less interest in funding.

Green banks are usually nonprofit or public-private institutions. The first to use the term “green bank” in the United States is the Connecticut Green Bank, which began in 2011, aiming to serve low-income communities.

Other U.S. green banks have since opened in California, Hawaii, Maryland, Michigan, New York and Rhode Island. The United Kingdom, Australia and Japan have likewise established green banks.

Green piggy bank Credit: (© Shutterstock)
(© Shutterstock)

Where does the money come from?

Some funding comes from state, local or national governments. That money is often used to attract more robust funding from the private sector — from venture capitalists, corporations or other organizations that support clean energy.

Utility companies may levy a green-energy surcharge that supports green banks. Some states and localities issue green bonds, drawing more capital to clean-energy projects.

Fees from taxing carbon emissions can build green finance reserves. A government may also allocate funds in the budget for green financing institutions.

Nonprofit foundations with an environmental mission offer grants or invest in green banks and projects. The Annenberg Foundation, the Hewlett Foundation, the MacArthur Foundation, the Rockefeller Foundation and the Skoll Foundation are among those that support clean energy.

In the business sector, firms such as Boeing Company offer green grants. And, increasingly, major energy corporations have become investors in clean energy. GE’s venture capital arm GE Energy Financial Services invests in renewable energy. Oil giants Royal Dutch Shell and Total (France) have stepped up investment in clean energy and joined BP (UK), Eni (Italy), Repsol (Spain), Saudi Aramco and Statoil (Norway) to set up an investment fund, Oil and Gas Climate Initiative Climate Investments, to develop renewable energy technologies.

Financial institutions focused on community development are important funders of green projects. The Development Bank of Southern Africa announced in late 2016 it has funded 21 renewable-energy projects since the launch of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) — and they are turning a profit.

As environmental responsibility and sustainability become routine best practices in businesses and governments worldwide, things are trending green. Green finance may be an emerging area of banking, but it’s building momentum. One sign, according to Bloomberg Markets, green bonds are booming, as more kinds of green securities are introduced.

By: Lea Terhune