what is green, sustainable and climate finance

There is no clear definition of green finance, being this normally considered the financing instrument of green economy[1].  But, actually, green finance addresses more broadly the overall financial challenges faced by sustainable development. One challenge stays with financing efficiency,  as efficient markets will guarantee the fair allocation of resources. In the unfortunate case of market failure, a second challenge will arise: the need to ensure fair treatment to all parties. To face up fairness, finance should include ethical standards implementation to secure natural and human resources availability to future generations. The third challenge resides in addressing adequately the consequences of human actions (such as climate change, geopolitics, etc.) by financing the transition risk without the associated potential of mispricing or overestimate risk.  Efficiency support, transition risk evaluation and management and ethical standards are therefore the main pillars on which green finance should hinge to really contribute in a tangible and measurable way to the Sustainable Development Goals (SDGs) implementation.[2]

In the act of defining or making green finance definite, also boundaries and characteristics of action become specified, as well as, the criteria to uniquely identify it. What emerged from a literature review in the area of green growth, green economy, sustainable and climate finance is that data cannot be easily compared across sources. Because a lack of consistent definition makes the assessment of green finance flows problematic as terms are not used consistently with related data collection bias. Consequently, most of data are collected only for climate finance, for which each year there is an evaluation of impacts, a map of flows and the definition of geographical, institutional and political gaps. On the other side, there is little available on green finance based on original data.

However, there is no standard definition of climate finance, neither.[3] The United Nations Framework Convention on Climate Change’s (UNFCCC) definition of climate finance refers to local, national or transnational financing, which may be drawn from public, private and alternative sources of mitigation and adaptation financing.[4]Further distinctions can be made between public and private climate finance. Private climate finance typically refers to capital provided by the private sector. Public climate finance constitutes public funds raised through taxes and other government revenue streams for climate change projects, whether international or domestic.[5]

International climate finance is the term most frequently used in the context of international political negotiations on climate change.  It is normally used to describe financial flows from developed to developing countries for climate change mitigation/adaptation activities, like building solar power plants or walls to protect from sea level rise. While, the “MDBs’ climate finance” refers to the financial resources committed by MDBs to develop activities with climate change mitigation and adaptation co-benefits in developing and emerging economies. In its broadest interpretation, climate finance refers to the flow of funds toward activities that reduce greenhouse gas emissions or help society adapt to climate change’s impacts. It is the totality of flows directed to climate change projects. Through the Cancun Agreements, for example, the developed nations pledged to financially assist developing nations with their climate mitigation and adaptation activities—explicitly recognize that tackling climate change requires “new and additional” funding. Under this definition, only those financial commitments that truly represent investments beyond a business-as-usual case would qualify to be categorized as climate finance. However, there is little agreement on what qualifies as “additional”, and much less how to quantify it. 

There is also a definition for sustainable finance which, in a narrow sense, means integrating the Environmental, Social and Governance (ESG) criteria into financial investment decisions. In a broader sense, sustainable finance refers to a financial system that is promoting sustainable economic development rather than exploitation and speculation; sustainable social development rather than inequality and exclusion; and sustainable environmental development rather than damaging the endowments of nature.[1]

From the above, green finance can be seen as a subset of the more strategic sustainable finance agenda. China has popularized the term green finance in its domestic work and within the G20[2], referring to it as finance that generates explicit environmental benefits.  Even though, environmental benefits create social benefits, so there is not a clear difference between green and sustainable finance.  Anyhow, at present is sustainable finance, which has the broadest definition: ¨a financial system that is stable and tackles long-term education, economic, social, environmental issues, including sustainable employment, retirement financing, technological innovation, infrastructure construction and climate change mitigation¨[3] as stated by the European High-Level Expert Group (HLGE) on the Sustainable Finance recommendations.

[1] High-Level Expert Group on Sustainable Finance interim report (2017) Financing a sustainable European economy

[2]  Group of 20 (Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, México, Russia, Saudi Arabia, South Africa, Korea, Turkey, the United Kingdom, United States and European Union)

[3] HLEG Report Financing A Sustainable European Economy page 7 https://ec.europa.eu/info/sites/info/files/170713-

[1] UNEP (2011) Towards a Green Economy: Pathways to Sustainable Development and Poverty Eradication

[2] Financing Green Economy, Towards a Green Economy in the Mediterranean (2016), page 99

[3] World Resource Institute Climate Finance [consulted 20/02/2018]

[4] http://unfccc.int/focus/climate_finance/items/7001.php [consulted 20/02/2018]

[5] Climate Finance and the Private Sector [consulted 20/02/2018]