The global environment and climatic systems are heating up due to increased human activities. Making it happen due to technology and the availability of natural resources would be one of the greatest challenges that the cleantech revolution would be facing in the global market. In a short span of time, funding cleantech projects without sacrificing profitability and improving quality of life for a sustainable community has been understood to be a viable solution to the problem. In this context, it may be mentioned that a new stream of finance has emerged called environmental finance. The chapter throws light on the typology of funding agencies engaged in providing environmental finance and the role of governments in formulating relevant policies to promote lending for environmental projects. An array of financing instruments for environmental projects has been discussed to indicate the mobilizing potential for such projects with special reference to India.
TopWhat Is Environmental Finance?
Environmental Finance (EF) is a new offshoot of 'finance' extending its contours typically to non- commercial, non-industrial and traditional ventures. Its emergence has added a new dimension to the field of finance. In common parlance, EF is used interchangeably with the terms “Green Finance” and “Sustainable Finance”. As it is different in nature and deployment, its sources, applications, institutional mechanism too are different and so are the regulatory and public policies, and the processes and systems governing EF. The models belonging to environmental finance include traditional finance, low-carbon finance, climate finance, green finance, socio- environmental finance, and sustainable finance. EF is a paradigm shift in the field of finance and sustainable development impacting the humankind.
Environmental finance is a relatively new field of finance. Economists and international organizations have failed to establish a precise definition or agree upon one unanimously. However, workable definitions have been developed by various scholars, organizations, and governments (Labatt, 2003). An interesting variation in this is that specific organizations have coined the following phrase: a sustainable financial system (Hira, 2012). Nevertheless, their tools and mechanisms are the same. A sustainable financial system incorporates the development of values and aids in dealing with financial assets, so that actual wealth may be used to meet the demands of an ecologically sustainable and inclusive economy over time (Force, 2015).
Environmental finance concerns itself with the impact of environmental issues on financial decision making, which is essentially a three-step process. The first step is to identify sources of risk and opportunities to create value.
“Knowledge, on the whole, is an environmentally neural asset that can contribute to the future” (Solow, 1991).
In the context of the banking sector, PwC (2013) mentioned the following attributes of EF:
- 1.
product and service innovation which promote responsible investments, and
- 2.
support low–carbon technologies projects.
To quote Finanças Brasileiras Sustentáveis:
“EF refers to the integration of sustainability aspects in the decision-making processes of financial market actors, financial market policy and related institutional and market arrangements that contribute to the achievement of strong, sustainable, balanced and inclusive growth” (Sommer, 2020).
As defined by Nobel Laureate Robert Solow:
“Environmental finance concerns itself with the impact of environmental issues on financial decision making, which is essentially a three-step process. The first step is to identify sources of risk and/or opportunities to create value. This requires a better understanding of the interconnections between ecology and economics, which is a good thing” (Solow, 1991)
There is no one common definition of EF. However, keeping in view the above definitions, EF could be said to constitute the following:
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the financing of public and private green investments in water management or protection of biodiversity and landscapes;
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extending public policy related finance for choosing and implementing environmental activities;
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deal with that part of the financial system devoted to environmental projects.
TopOrigin Of Environmental Finance
EF is an emerging field so far not much known to the financial experts, public policymakers, business and industry personnel, barring those engaged in emission trading. Sandor (2016) pointed out that EF concerns itself with economic and market analysis related to finance, used for funding conservation initiatives, create a symbiotic relationship between businesses and the environment and enhancing the quality of life for society without lowering profitability. EF combines insights across the social sciences, natural sciences and humanities disciplines to help combat critical environmental issues and connected societal risks. In this context it may be mentioned that climate change resulting from volatile weather conditions expose corporate assets to severe risks. In addition, regulatory resource constraints are affected by climate change (Linnenluecke et al., 2016).