What makes green finance green?

Last month I was delighted to help TheCityUK inaugurate two things: a new economic research report on green finance, but also a collaboration with Imperial College Business School’s Centre for Climate Finance & Investment, with whom we co-wrote the report.

TheCityUK’s first-ever report that looks holistically at green finance, the research seeks to answer the question of what, exactly green finance is. In addition, it offers an overview of the state of the market and considers the UK’s role as a global green finance leader. 

The definitional question is much trickier than might be assumed. A workable definition of green finance needs to be expansive enough to reflect the breadth and diversity of the sector—and also to remain relevant as the sector undergoes rapid growth and evolution. But it must be precise enough to have practical applicability, and to provide a useful metric for regulators and market participants. Our definition builds on existing research and emphasises measurability as well as an explicit link to environmental goals.

Nuanced though the definitional issues may be, they are central to the effort to make green finance as accessible—psychologically as well as legally and financially—as previously specialist areas that are now familiar and mainstream, like ‘emerging markets’. For green finance specialists, defining things facilitates the creation of benchmarks, which in turn allow investors to create green finance-focused strategies. And for the broader financial services community, clear definitions are vitally important in enhancing awareness and demonstrating the sector’s relevance.

The fact that our definition is not prescriptive about the environmental goals to be met opens the door for further reflection, refinement and evolution of the ideas in our research. For example: will the growth of green equity instruments take the form of an increase in the volume of specialist green equity funds, or an increase in the number of conventional funds that incorporate a “green” element? Can investment in fossil fuel-based energy ever be considered green if, in a given context, it would be more environmentally friendly than the alternatives? Can the financial services sector develop entirely new green products or services, rather than adapting exists products (such as bonds) into green products? We don’t claim to have all the answers to these and myriad other questions posed by a fast-growing new inter-disciplinary sector—but our new research should help advance the debate.