Sustainable Finance & Green Bonds

• Sustainable finance considers environmental, social, and governance (ESG) factors in investment decisions within the traditional financial sector.
• The goal is to increase investments in sustainable activities and assets.
• It finances sustained growth while mitigating environmental damage and social inequality.
• Mechanisms include ESG investing, socially responsible investing (SRI), green bonds, sustainability bonds, and impact investing.
• These mechanisms direct financial resources towards initiatives with positive environmental and social outcomes alongside financial returns.
• Sustainable finance is crucial for achieving global sustainability goals like the UN's Sustainable Development Goals (SDGs) and the Paris Agreement on climate change.
• Integrating ESG factors drives innovation, improves resource efficiency, and enhances long-term value for investors and society.

Green Bonds

• Green bonds are fixed-income instruments designed to raise capital for environmentally beneficial projects.
• Proceeds are earmarked for projects that contribute to climate change mitigation and adaptation, natural resource conservation, biodiversity protection, and pollution prevention.
• Financed projects include renewable energy, energy efficiency, green buildings, clean transportation, sustainable water management, and waste management.
• Green bonds allow investors to support environmentally beneficial projects while earning a financial return.
• The market has grown rapidly due to increasing investor demand for sustainable investment opportunities.
• Green bonds enhance issuer reputation, increase financial performance of projects and contribute to sustainable development.
• Issuance diversifies funding sources and attracts a broader range of investors, including institutional and ESG-focused funds.
• Green bonds adhere to standards and guidelines like the Green Bond Principles (GBP) by the International Capital Market Association (ICMA).
• Verification is often performed by a third party to ensure transparency, credibility, and impact reporting.
• Corporations, governments, and development banks may issue green bonds.

Carbon Finance

• Carbon finance uses financial mechanisms and instruments to reduce greenhouse gas (GHG) emissions and mitigate climate change.
• It involves valuing carbon emissions and creating financial incentives for emissions reduction projects.
• Instruments include carbon credits, carbon offsets, carbon taxes, and emissions trading systems (ETS).
• Carbon credits represent a measurable reduction or removal of one tonne of carbon dioxide equivalent (tCO2e) from the atmosphere.
• Entities reducing emissions below a baseline can generate carbon credits and sell them to organizations seeking to offset emissions.
• Carbon offsets involve investing in projects that reduce or remove GHG emissions, like renewable energy, reforestation, and energy efficiency upgrades.
• Purchasing carbon offsets allows organizations and individuals to compensate for unavoidable emissions by supporting climate-friendly projects elsewhere.
• Carbon taxes are environmental taxes on activities that emit carbon dioxide, such as burning fossil fuels.
• Carbon taxes create a financial disincentive for carbon-intensive activities and encourage businesses and individuals to reduce their carbon footprint.
• Emissions trading systems (ETS), also known as cap-and-trade systems, set a limit (cap) on the total amount of GHG emissions that can be emitted by regulated entities.
• Allowances are distributed or auctioned off to these entities, allowing them to emit a certain amount of GHGs. Entities that reduce their emissions below their allowance can sell surplus allowances to those that exceed their limits.
• Compliance carbon markets are created by national, regional, or international policies and regulations, such as the European Union Emissions Trading System (EU ETS).
• Voluntary carbon markets operate outside mandatory regulatory frameworks, allowing organizations and individuals to voluntarily purchase carbon offsets to reduce their carbon footprint.

Relation Between Sustainable Finance, Green Bonds and Carbon Finance

• Green bonds and carbon finance are components of sustainable finance.
• Green bonds channel financial resources towards environmentally beneficial projects, while carbon finance instruments provide incentives for emissions reduction and climate change mitigation.
• Green bonds can finance projects that generate carbon credits or offsets, creating synergies between the two mechanisms.
• Proceeds of green bonds can be used for projects that qualify for carbon credits under various carbon finance mechanisms.
• Carbon pricing mechanisms, such as carbon taxes and emissions trading systems, can create additional revenue streams for green projects financed by green bonds.
• Sustainable finance encompasses a broader range of environmental, social, and governance considerations, while green bonds and carbon finance focus specifically on environmental sustainability and climate change mitigation.