Green finance – sustainability in the financial sector?
The financial sector and environmental protection – two terms that at first glance might seem to have little in common. Yet the theme of sustainability has long since been making inroads in the financial sector. "Green financial investments" are gaining ground and doing particularly well in Europe. According to the first edition of the Global Green Finance Index, nine of the world's top ten sustainable financial centres are located in Western Europe.1
Putting a halt to climate change and air pollution is right up there at the top of the political agenda. In order to reach the goals of the Paris Climate Change Agreement, investments of billions of euros are required. New reforms are needed in order to make green and sustainable investments more attractive. At the moment, it would even seem that businesses are a step ahead of the politicians. Many major investors are already paying close attention to sustainability. And insurance companies are following suit too. At the beginning of the year, Allianz announced that they would be completely withdrawing from the coal industry. Their shareholdings in companies that generate more than 30 percent of their turnover through coal are being gradually sold off. In this context, most companies are not interested in pleasing politicians. Rather they are giving consideration to risk minimisation and corporate credibility.2 A sustainable investment strategy can without doubt bring positive effects for a company's public image. And this is despite the fact that many consumers don't even know what it actually is that makes a financial product sustainable.
Green financial investments
Whether it's a question of securities, shares, investment funds or insurance policies – all financial investments that specifically support companies, projects or investments that benefit the environment and society in a sustainable way can be considered "green". The idea is to offer simple and reasonably-priced options for financing to climate-friendly projects. This includes, for example, companies that develop energy-efficient technologies, environmental protection organisations and also the Green Climate Fund. This was set up within the context of the Paris Climate Change Agreement and helps developing countries to reduce their greenhouse gas emissions and to deal with the challenges posed by climate change.
The market for sustainable financial products has grown at an above-average rate in the past two decades. For financial experts, green bonds and the like have long since ceased to be niche products and are in fact a profitable and attractive sector that not only helps society but also drives ahead the financial markets. In Luxembourg, a stock exchange has been in operation since 2016 which deals exclusively in green investments, the Luxembourg Green Exchange.
No market without challenges
Experts estimate the profit potential of a green economy to be several trillion dollars. Nevertheless there is still a long way to go until this is achieved – currently only around five to ten percent of all bank transactions are "green". There has above all been criticism of the lack of controls and transparency for green products. It is often unclear how sustainability is to be defined and how the investments or funds are actually making a contribution towards climate protection. For most investors, the exclusion of child labour and genetically-modified products does not go far enough. However, if a fund has a lot of exclusion criteria, then it is more susceptible to price risks. Thematic funds, such as renewable energies, would seem to be more promising; they can however also run into problems if there are changes in the political or economic framework conditions. Despite the great potential, there are still a number of questions that have yet to be clarified. Nevertheless, experts are assuming that the demand for green, social and ethical shares and funds will continue to rise in the future.