Green finance: a key driver of ecological transition

Green finance plays a crucial role in combating climate change and achieving global environmental goals. This growing financial sector focuses on funding sustainable projects while supporting the energy transition. Let’s explore the main instruments, stakeholders, and challenges that make green finance a pillar of the ecological transition.

What is green finance?

Established during the COP 21 in Paris in 2015, green finance is defined by the Banque de France as “all financial operations supporting sustainable development, particularly by promoting the energy transition and combating climate change.”

Its goal is to make financial flows more sustainable and compatible with ambitious economic objectives, while reducing their carbon footprint. Green finance encompasses financial operations and instruments that support environmental, social, and governance (ESG) projects, fostering a more responsible and sustainable economy.

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Key instruments of green finance

Green Bonds

Green bonds are debt instruments aimed at funding projects with a positive environmental impact, such as renewable energy, clean transportation, or energy efficiency.

A growing market: In 2023, global green bond issuances reached $587.6 billion, highlighting the increasing demand from investors.

A dual benefit: These bonds enable governments, companies, and institutions to raise funds while demonstrating their commitment to ecological transition.

Green investment funds

Green investment funds pool capital to finance companies or sustainable projects, prioritizing ESG criteria. They attract a growing number of retail and institutional investors seeking to combine profitability with responsibility.

Specific Labels:

• Greenfin Label: Created by the French Ministry of Ecological Transition, it highlights funds genuinely committed to sustainable projects.
• SRI (Socially Responsible Investment) Label: Promotes financial products meeting ESG criteria.
• Green Growth Crowdfunding Label: Supports projects related to sustainable development, renewable energy, or organic agriculture via crowdfunding platforms.

Examples of Green Investment Funds / Banks: Greengot, a French fintech, develops a payment account and a life insurance product with investments directed toward industries linked to the ecological and energy transition.

The carbon market

The carbon market is based on setting a price for CO2 emissions, encouraging companies to reduce their carbon footprint. Companies emitting less than their quota can sell their surplus allowances. However, this system faces challenges such as price volatility and regional disparities, limiting its overall effectiveness.

Green Taxonomy

The EU Green Taxonomy is a regulatory framework defining sustainable economic activities:

The main objective is to help investors identify genuinely green projects and enhance transparency. A lot of sectors are covered, such as, energy, transport, and infrastructure, with scientific criteria to assess their environmental impact.

Key players in green finance

Public actors : Governments and public financial institutions, such as the World Bank or the European Investment Bank, are key drivers, heavily funding sustainable projects. In 2020, 76% of development banks’ financing was dedicated to climate change mitigation.

Private actors

• Large corporations: They issue green bonds and invest in low-carbon technologies to reduce their ecological footprint.
• Startups: Innovative companies in renewable energy or waste management attract green funds to support their growth.

A major challenge: Greenwashing

Greenwashing, where companies or financial products falsely present themselves as environmentally friendly without tangible proof, remains a persistent issue. 

Negative Impact: It undermines investor confidence and slows down the ecological transition.

Solutions: Stricter regulatory frameworks, such as the EU Green Taxonomy, and independent audits are essential to strengthen the credibility and transparency of green initiatives.

For example, the HSBC USA Sustainable Equity ETF claims to aim at “reducing carbon emissions and exposure to fossil fuel reserves,” yet nearly 3% of its assets are invested in major companies that still derive the majority of their resources from oil, gas, and coal (ExxonMobil, ConocoPhillips, etc.).

An indispensable tool for addressing environmental challenges

With its varied tools—green bonds, ESG funds, the carbon market, and the green taxonomy—green finance is a critical lever for achieving climate goals. However, the financial needs remain enormous: according to the International Energy Agency, $830 billion per year in additional energy sector investments are required between 2016 and 2050 to limit global warming to 1.5 °C.

To meet this challenge, enhanced collaboration between public and private stakeholders, supported by stricter regulations, is essential. With stronger efforts and collective mobilization, green finance could become a central engine of the global ecological transition.