Green Investment Financing Instruments

Green Investment Financing Instruments

Vilma Kazlauskiene (Vytautas Magnus University, Lithuania) and Aura Draksaite (Kaunas University of Technology, Lithuania)
DOI: 10.4018/978-1-7998-2193-9.ch010

Abstract

The chapter analyses the peculiarities of current green financing instruments. Rapid development of these instruments markets prompts the need to comprehend the main factors behind it, and thus the necessity to recognize opportunities to profit by the occasion. In the chapter, such green financial instruments as green bonds, green equities, and green loans are discussed. Also, private green investment promotion instruments are overviewed. Current green financial instrument market development trends are presented, and main contributing factors are provided. Furthermore, main challenges of investing and development of environmentally sustainable business practices are analyzed. Based on the analysis results, insight regarding further development of green financial markets is offered.
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Introduction

Environmental sustainability issue is one of the most important issues worldwide. Attempt to create environmentally responsible environment requires a considerable amount of capital. Therefore, the need for innovative fundraising alternatives has emerged and caused the evolution of the green financial markets. Since the very beginning, new markets and financial instruments face various challenges. Even definitions of many green instruments are not unified globally or even internationally. Lack of agreement on the terms of green financing, green instruments’ features often results in the lost opportunities for green project funding. Various issues of green financing were analysed by Banahan (2019), Bracking (2019), Dafermos et al. (2018), Park (2018), Tripathy (2017), Trompeter (2017) and many others.

Significance of the issue is also attested by the number of countries, involved in an attempt to resolve the challenge of raising capital for various green projects. For example, the Paris Agreement (agreement to reduce the global warming or at least to minimize its growth rate) was signed in 2015 by 179 countries of various development levels. Issued guidelines for green investing in many countries can be followed voluntarily, but in some countries, such guidelines are already compulsory. All transnational institutions (such as World Bank, Organization for Economic Cooperation and Development, World Resources Institute, European Investment Bank and many more) also take an active role in solving problem of fundraising for the development of environmentally sustainable practices. Different green financing instruments were introduced in search of optimal way to raise the needed funds (cases of such instruments and their effect were analyzed by Dafermos et al. (2018), Yadav et al. (2016), Silva and Cortez (2016), Little et al. (2015), Heckerta and Rosan (2016) and others. And new green financial instruments are being introduced at fairly fast pace.

It might be caused by the fact, that despite many setbacks, green financing instrument markets are rapidly evolving and growing. Therefore, analysis of the main factors, contributing to this market evolution should be analyzed in order to understand (for decision-makers – to make informed decisions), what further market makers’ actions could induce market growth rate or maintain it at a desired level. Also, the peculiarities of the green financial instruments themselves should be analyzed as it has a direct effect on the fundraising potential.

The goal of the chapter is to analyze main current green financing instruments, trends, causes and challenges of their market development, and potential accelerators of green financing instruments markets. Therefore the main objectives are the following: overview and analysis of green bonds and green equities attributes and market trends, overview of types and significance of green loans and budget financing instruments, presentation of private green investment promotion instruments, showcasing different types of the instruments, the role of public financing institutions in financing green investment.

The up to date literature and databases were selected to achieve the objectives mentioned above. The latest policies concerning green financing instruments are presented, while historical data is also used to demonstrate trends of the analyzed instruments.

Key Terms in this Chapter

Grants: Resources that are intended to finance green investment, without expecting the money to be repaid.

Green Investing: Investing in coherence with the socially responsible investing, but focuses on eligible environmentally conscious business practices.

Green Bond: A debt security, issued to fund green or sustainability-oriented business practices, eligible for such funding.

Green Loan: A type of loan, which is used by financial institutions (banks, credit unions) to finance the environmentally friendly projects.

Green Index: An index, covering companies mostly working to induce environmental sustainability.

De-Risking Instruments: The instruments that reduce private investment risk and encourage a more active participation in financing green investments.

Green Equity: Equity of the company, working to increase environmental sustainability and using raised capital for this cause.

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