This short article looks at green financing, which is part of the AFM syllabus area B3.
Green finance does not have a globally agreed definition, but for the purposes of AFM it can be considered to be specific financing for projects or initiatives which will have a positive environmental impact.
This means there is a commitment to investing the funds raised into ‘green’ projects such as:
As a result, the use of green finance means that sustainability and environmental factors become part of mainstream financial decision making.
Green finance, which is typically debt finance, is often cheaper than conventional debt finance, thereby creating a saving on interest expense for an organisation.
Another aspect is that the use of green finance can demonstrate that a project is sustainable and environmentally friendly. This can help to improve a corporate image and reputation.
Green financing involves additional costs as a result of increased reporting requirements. It will need to be shown that the project or initiative being financed will actually have a positive environmental impact. This may require an independent audit and even if not, there is likely to be an increased administrative burden because of this.
In many cases, the benefits related to savings and the impact of additional costs should be fairly straightforward for an organisation to assess. Then a cost-benefit analysis can be undertaken to see whether the green finance is worthwhile.
Written by a member of the AFM examining team