What Is Green Finance?

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  • Written By: Geri Terzo
  • Edited By: PJP Schroeder
  • Last Modified Date: 21 May 2020
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Green finance is a phenomenon that combines the world of finance and business with environmentally friendly behavior. It is an arena for many participants, including individual and business consumers, producers, investors, and financial lenders. Green finance can be expressed differently depending on the participant, and it may be led by financial incentives, a desire to preserve the planet, or a combination of both. In addition to demonstrating proactive, environmentally friendly behavior, such as promoting mass transit or the recycling of used goods, green finance is about avoiding the promotion of any business or activity that could be damaging to the environment now or for future generations.

Financial institutions that extend lending to individuals, small businesses, or large corporations can do so in an environmentally friendly manner. In this type of green finance, loans are used to promote the proliferation of renewable energy, for instance. A lender could finance the development of a solar power plant that generates power from the sun and panels installed on the roof of a building or residence. Wind power generation is another type of business that would win favor with green financiers. These companies develop expensive wind farms that use large turbines onshore and offshore to capture the wind and generate energy.

Energy producers who use fossil fuels, including coal, are not likely to participate in any type of green finance. Coal is a traditional power source that releases emissions into the air, substances that are largely considered harmful for the environment. As a result, a coal producer is the type of company that a green finance participant would likely avoid. Clean coal emits fewer emissions but may never be classified as a green investment.

Another way to encourage green finance is to offer environmental incentives to market participants. Small businesses that are not even in the business of clean energy can participate because this is an extremely proactive form of green financing. For instance, a company that sells vehicles may focus on selling cars that are designed to use a hybrid fuel combining both fossil fuels and renewable energy. This business might offer customers an incentive to purchase a car, for example, and in exchange for every vehicle that is sold, the dealer will purchase and plant a tree to promote a clean environment.

Venture capitalists, or firms that extend financing to start-up companies for growth, actively participate in green finance. Many clean energy firms are behind emerging technologies that are expected to produce a greater portion of the world's power in the future. Venture capitalists specialize in risky and emerging technologies and, as a result, tend to have a hand in green financing.

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