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Let us begin with a quick recap on what sustainable finance and green finance are all about. Sustainable finance integrates environmental, social, and governance (ESG) factors into finance to pave the way for sustainable development. Whereas green finance focuses on the environmental factor in particular, which is already a vast sector by itself (Figure 1). Each of the elements in ESG are interrelated and may overlap as the interest of all parties are taken into consideration when making financial decisions. Green finance encompasses investments that have positive environmental effect, green technologies, green financial products and services and many more.
Figure 1: Elements of Sustainable Finance
The UN Environment - World Bank Group Initiative has published a roadmap for sustainable finance consisting of three drivers of change; market, national, and international initiatives (Figure 2). With increasing environmental awareness, markets have been responsive to the growing public demand to go green by integrating sustainability element into their business model.
Figure 2: Roadmap Structure
For instance, Trine is a Swedish company that provides a platform for the public to invest directly in solar energy projects; ergo, investors can gain returns on their investment while indirectly contributing to Goal 7 of Sustainable Development Goal (SGD): Affordable and Clean Energy. In 2016, Alipay, a popular mobile payment app in China, launched the Ant Forest program which brilliantly fuses FinTech with green finance. Ant Forest individualizes users’ carbon footprint reduction when they carry out activities like taking public transport, biking, walking, going paperless or foregoing disposable cutleries and plastic packaging when ordering food delivery. Users will be rewarded with “green energy points” for engaging in these low-carbon activities. By accumulating “green energy points”, users can grow virtual trees in the app, and subsequently real trees will be planted by Alipay’s NGO partners. Having amassed over 600 million users and planted 326 million trees in China, Ant Forest became the inspiration for GCash, Philippines’ leading mobile wallet app to introduce a similar function known as GCash Forest. These innovative bottom-up approach encourages the public to be actively involved in climate change mitigation effort by simply adopting a low-carbon lifestyle.
On a national scale, public authorities have jurisdiction over policy standards and regulation of green financial products such as green bonds as well as market platforms like fintech. Green bonds are similar to regular bonds, except they are meant exclusively for projects that bring positive environmental impact, hence facilitating funding for sustainability projects. First issued by European Investment Bank in 2007, the green bond market has rapidly grew over time, surpassing US$ 1 trillion in green bond cumulative issuance by 2020 (Figure 3). In fact, green bonds are in such high demand that they get oversubscribed a lot and rapidly sold out. An example of how regulation plays a role in this sector is when Singapore Exchange (SGX) made climate reporting compulsory for all listed companies on a “comply or explain’ basis starting from 2022. This allows investors to be well informed on the climate impacts, risk and opportunities associated with the business practices.
Figure 3: Cumulative Issuance of Green Bonds from 2007 to 2020
The transition towards green finance is not complete without cooperation between countries. The European Union (EU) has not long ago set a legally binding goal of achieving climate neutrality by 2050 via the European Climate Law. It is important that collective action is communicated across country borders to support the development of low-carbon and sustainable economy.
You may be wondering, how are people reacting to this growing phenomenon? A research done by McKinsey has shown that more than 70% of consumers across multiple industries are willing to pay an additional 5% to purchase a green product that has a non-green alternative. This is in part attributed to a paradigm shift on the significance of sustainability among the society. What better opportunity for businesses to pay attention to what their consumer wants and act upon it responsibly? 3M, a company fully committed to improving their environmental footprint since launching the Pollution Prevention Pays programme (3P) in 1975, has saved US$ 2.34 billion and prevented 2.85 million short tons of pollutants from the programme alone. This shall serve as an inspiration for other companies to make sustainability a priority.
Next up, we will further explore the development of green finance sector in Malaysia. Stay tuned!
References:
3M 2021 Sustainability Report: https://multimedia.3m.com/mws/media/2006066O/2021-sustainability-report.pdf
Digital Technology Shaping Green and Sustainable Lifestyles: Exploring Alipay Ant Forest. 2020. Green Digital Finance Alliance: https://www.greenfinanceplatform.org/research/digital-technology-shaping-green-and-sustainable-lifestyles-exploring-alipay-ant-forest
Explaining Green Bonds. 2020. Climate Bonds Initiative: https://www.climatebonds.net/market/explaining-green-bonds
Henisz, W. Koller, T., Nuttall, R. Five ways that ESG creates value. 2019. McKinsey Quarterly
Roadmap for a sustainable financial system. 2017. United Nations Environment Programme and the World Bank Group: http://documents.worldbank.org/curated/en/903601510548466486/Roadmap-for-a-sustainable-financial-system
Written By:
Yong Kai Qi