Mainstreaming environmental finance into financial markets – relevance, potential and obstacles

Abstract

Mainstreaming environmental finance widens the utilisation of existing instruments and extends them to environmentally beneficial activities. The objective is to serve clients in ways that make environmental finance a normal set of retail products. The sheer number of households and MSMEs (micro, small and medium enterprises) give providers the weight and opportunity to address environmental concerns. Financial institutions have a key role in environmental finance in ways that ensure sustainable development (Millennium Development Goal 7). Households, MSMEs and municipalities have an enormous range of technically viable environmental investments. But the actual demand is still much below the potential. This is because the material and/or financial benefits of environmental activities have been limited. ‘Greenbacks’ have been more important than ‘green thought’. However, this market is growing along with higher energy prices, and will grow further if the emphasis on subsidy is shifted from fossil energy to sustainable energy. The current demand for environmental investment is limited. But many potential investments are on the frontier of viability. To increase their viability, they usually require longer maturities and a high sensitivity to the structure and the conditions of capital cost financing. The trend of green financial products has not yet penetrated emerging markets and developing countries. Most banks are in the early stages of integrating environmental factors into their internal procedures, offering only a few financial products in this field, because they believe other opportunities earn higher returns. Environmental finance faces a three-dimensional gap between needs and supply: instruments, funds and conditions. These, and the insufficient knowledge, lack of institutional capacity, and opportunity and start-up costs, constitute the challenges for financial institutions entering the field of environmental finance. But successful cases prove that there are significant advantages from approaches that at the same time address the demand for environmental finance and benefit both the financial institution and the borrower. Increasing the range for such win-win situations will require substantial support from the international community, not only in the form of access to funds, but also in becoming more proactive by including environmental aspects in banks internal sustainability strategies. It will take enormous efforts for financial institutions and their international partners to capitalise on the fact that energy is money. Moreover, environmental protection means business – and money and business are bankable.