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Green Financing: why is it important?

Green finance has the potential to generate real, powerful, large-scale change.

Our world is in transition: the devastating effects of the climate crisis are no longer just a future projection, but a current reality, and much of the global economy has already set out to achieve the sustainability goals dictated by the United Nations.

What is green finance?

Green finance, as defined by the United Nations Environmental Program, is any financial activity, whether credit, loans or investments, focused on projects, companies, governments or individuals, with environmental sustainability priorities. They are usually conditioned to the fulfillment of guidelines that guarantee an environmental benefit or the reduction of an environmental impact.

This type of financing usually comes from banking entities and governmental programs for sustainable economic promotion. The BBVA bank, for example, reached last year (one year ahead of schedule) 50% of its green financing goal of 100 million euros, proposed for 2025. A large part of these 50 million euros credited by these financing lines have been allocated to energy efficiency in homes and, to a lesser extent, to the development of sustainable mobility.

Benefits of environmental credit

The following are some of the general benefits of acquiring environmental credit:

  • Incentives such as reimbursement of a portion of the investment, depending on the reduction of environmental impact.

  • Some financial institutions have preferential rates

  • Tax incentives

  • Technological upgrading

  • Reduction of environmental impacts

  • Increase in the company's productivity and improvement of the work environment

Green bonds, in Spain and worldwide

Green bonds are financing mechanisms, issued by public or private institutions, aimed at investing in sustainable and socially responsible projects, from renewable energies to waste management and clean transportation.

At the beginning of September last year, the Spanish Treasury issued a first round of green bonds for 5 billion euros, for which it received an initial demand of 60 billion euros, one of the largest in Europe for this type of financing. In turn, according to the Environmental Bonds Initiative, during 2021 a record US$ 517 billion in green finance was issued worldwide: a result halfway to the target set for 2025 by the initiative itself, and which shows for the tenth consecutive year a considerable increase (an indicator, in turn, that the global trend is increasingly pointing towards sustainability).

Why is green finance important?

The main obstacles slowing down the transition to a green and sustainable economy are government regulations on the one hand, and the need for investment on the other. Green finance can help overcome both of these impediments:

On the one hand, it can serve to encourage the implementation of new green laws and regulations aimed at regulating the sustainable development of entire countries and reducing the environmental impact of typically polluting industries, especially in the energy and agro-industrial sectors, as is the case with the World Bank's new climate action plan, which seeks to grant credits to developing countries focused on a series of sustainable goals and guidelines, such as reducing carbon footprints through the implementation of green taxes, and encouraging new sustainable industries. In 2021 alone, the World Bank granted more than $26 billion in green financing.

On the other hand, it can serve as an enhancer for companies and entrepreneurs: for the former, on their way to reducing their environmental impact and carbon footprint; for the latter, to encourage the formation and growth of new projects that, from their conception, are structured to solve environmental problems.

Who is eligible for green financing?

In general, any company that can reliably demonstrate that it will use the funds in a project aimed at achieving an environmental benefit (an offset or compensation) or reducing an environmental impact can potentially apply for this type of financing. Most of the projects that get it are related to:

  • Renewable energy

  • Energy efficiency

  • Biodiversity conservation

  • Transition to clean modes of transport

  • Water management

  • Green buildings

In Spain there are many banks that offer green financing lines and each one has its own specific requirements, and also its own benefits, which usually revolve around preferential rates, fiscal and tax incentives, incentives marked by objectives, such as the reduction of rates according to the achievement of certain ecological goals, and so on.

Today, the vast majority of European banks, such as BBVA, Banco Santander or CaixaBank, offer green financing lines in the form of bonds, loans and incentive programs.

Thus, the growth and accessibility of these green financing lines is great news and a healthy source of hope: the more governments, banks, entities and companies bet on this type of mechanisms, the more our economies will be able to accelerate the transition to sustainable models that guarantee the environmental balance that our planet needs so much.

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