Why ‘green’ finance isn’t always as sustainable as it seems

In the wake of the 2007-08 global financial crisis, green finance has been increasingly celebrated as a way to tackle environmental challenges. Banks, investment funds and insurers have rolled out a growing range of green products, from green bonds to sustainability-linked loans. This momentum is encouraged by international environmental efforts such as the Paris climate agreement.

By aligning financial flows with sustainability goals, the world can supposedly “green finance” its way into a sustainable future.

But beneath this green spectacle lies a more complicated reality. Green finance^[1] refers to a wide-ranging mix of private and public funds, products and practices. For example, there’s no consensus regarding what makes a bond green^[2].

There is also little clarity around what current environmental, social, governance (ESG)^[3] frameworks – which encourage businesses and authorities to disclose and monitor their environmental and social performance – are truly achieving.

Ever wondered how to spend or invest your money in ways that actually benefit people and planet? Or are you curious about the connection between insurance and the climate crisis? Green Your Money^[4] is a new series from the business and environment teams at The Conversation exploring how to make money really matter. Practical and accessible insights from financial experts in the know. In 2015, the former Bank of England governor and current Canadian prime minister, Mark Carney^[5], insisted that finance can and must urgently account for climate risks. Meanwhile, Stuart Kirk^[6], former global head of responsible investments at high street bank HSBC, argued that these risks were overstated and too far in the future to be material. Environmental issues have become a concern for financiers, but not necessarily out of commitment to improving planetary health – rather due to reporting costs, transition risks and reputational pressure. High-profile greenwashing scandals, such as “green bonds” allegedly linked to deforestation in Sumatra^[7], have further eroded trust. This raises questions about whether green finance is more a branding exercise than transformation. ESG investing explained. In the face of these ambiguities, the environmental sciences are involved in the expansion of green finance. As social scientists we have been following these developments, wondering whether they may help us pin down robust ways to develop green finance. Some companies are now using science-based targets (emission reduction goals aligned with climate science), net zero transitions pathways or roadmaps, and high-integrity carbon credits (verified purchases of direct air capture credits to offset greenhouse gas emissions). Most of these claim to rely on rigorous calculations. The language of science grants objectivity and legitimacy. At its most basic level, this “sciencewashing” uses the vocabulary and authority of science to claim sustainability outcomes. Read more: Green bonds can help finance clean energy – as long as the projects they fund are transparent^[8] Green finance also provides many employment opportunities for environmental scientists who can work as consultants, auditors and certifiers, to assess the quality of green claims. Many startups have emerged, offering a range of high-tech services to provide environmental data to companies. That includes monitoring deforestation through remote sensing or using sounds to analyse wildlife activity. Green finance-related industries are flourishing and more and more environmental graduates are being recruited to quantify emissions, build risk metrics, monitor changes in biodiversity and verify credits. Drawing on five years of research and combining data emerging from participation in green finance conferences and seminars, interviews and document analysis, our study^[9] warns against different forms of sciencewashing.

Mounting evidence^[11] suggests a gap between the suggested possibilities and the actual outcomes of green finance. Many green finance products appear to serve financial markets and the wealthiest investors more than nature or vulnerable communities.

Even more concerning are the unintended consequences. Far from levelling the playing field, green finance can exacerbate inequality. For example, communities have been displaced to make room for renewable energy projects or offset schemes.

This creates what are known as green sacrifice zones^[12]: areas where environmental harm or social costs are tolerated in the name of advancing “green” goals.

Poorer countries often face higher borrowing costs in the name of climate risk, while wealthy economies continue to access cheaper capital. Insurance premiums are also rising in climate-vulnerable regions, pricing out those least able to afford them. So green finance can make the situation for the most vulnerable populations worse.

In its current form, green finance will most likely sustain business as usual, leaving the causes of environmental crisis untouched.

For green finance to deliver the transformative change its advocates promise, it must address the deeper political and social issues, such as the role of public authorities in regulating finance, or the relationship between green investment and global inequality.

If green finance is to serve collective wellbeing rather than the interests of a privileged few, we need rigorous and proactive public regulations and better public debates on what green finance ought to account for.

References

1. ^{^} Green finance (theconversation.com)
2. ^{^} what makes a bond green (kclpure.kcl.ac.uk)
3. ^{^} environmental, social, governance (ESG) (www.youtube.com)
4. ^{^} Green Your Money (theconversation.com)
5. ^{^} Mark Carney (www.bankofengland.co.uk)
6. ^{^} Stuart Kirk (www.youtube.com)
7. ^{^} deforestation in Sumatra (mightyearth.org)
8. ^{^} Green bonds can help finance clean energy – as long as the projects they fund are transparent (theconversation.com)
9. ^{^} our study (www.tandfonline.com)
10. ^{^} Taljat David/Shutterstock (www.istockphoto.com)
11. ^{^} Mounting evidence (gijn.org)
12. ^{^} green sacrifice zones (thinklandscape.globallandscapesforum.org)
13. ^{^} Get a weekly roundup in your inbox instead. (theconversation.com)
14. ^{^} Join the 45,000+ readers who’ve subscribed so far. (theconversation.com)