Green finance: No longer a mousy!

Green growth

Green growth means achieving economic growth while reducing pollution and greenhouse gas emissions, minimising waste and increasing efficiency in the use of natural resources.

Large, long-term investments are needed to sustainably finance this desired green growth. Given the strain on public finances, large-scale private investment is needed for the transition to a green economy - even though public budgets have traditionally been an important source of funding for green infrastructure.

Policy framework

Governments and their programmes play a key role in strengthening domestic policy frameworks to mobilise - and channel - private finance and investment to support green growth. At the same time, international coordination is also needed to initiate reforms in the same direction, remove barriers and align goals. This is what the European Union is currently doing with its sustainable finance package: areas such as non-financial disclosure, benchmarking and a classification system of sustainable economic activities ("taxonomy") are being implemented.

In terms of sustainable investment, the European Union ranks first with total assets of over USD 14 trillion (Global Sustainable Investment Alliance, 2018). Growing concerns about the impact of climate change and the consequences of pandemics have drawn greater attention to environmental and social risks. Green finance is clearly also part of the European Commission's Green Deal unveiled in 2020.

But it is not only the European Union that has recognised the importance of the issue.

Global distribution

The market volume in the five most important regions for sustainable finance (USA, Europe, Japan, Canada, Australia and New Zealand) amounted to USD 30 trillion at the end of 2019. This represents an increase of more than 30% compared to 2016. The majority of sustainable assets are invested in capital markets (51%) and fixed income assets (36%). The remaining share is distributed across real estate, private equities and other types of assets (see Global Sustainable Investment Alliance, 2018). Globally, almost USD 1 trillion in assets were held in sustainable funds at the end of 2019. Of these, institutional investors accounted for around 75% and retail investors for the remaining 25%.

Investment strategies

In this context, it is important to understand the associated difficulties in distinguishing between ESG investing and 'impact investing'. ESG stands for the consideration of environmental, social and governance aspects in the investment process. However, this does not mean that only these factors are considered - not that they necessarily have an influence on stock selection. Clear guidelines are needed for this, such as those prescribed in the Austrian Ecolabel guidelines for sustainable financial products. This ensures that certain investments are excluded and others are preferred.

Impact investments focus on solving social problems or environmental challenges. According to the Global Impact Investing Network, the global impact investing market is estimated at USD 715 billion. Scepticism is warranted here, because the direct impact of investments is not always obvious. However, in view of the enormous need for financing, for example for climate protection measures, as well as the increasing sensitivity of investors, it can be assumed that the momentum in the area of sustainable investments will continue in the future.

It is therefore all the more important that there are quality labels such as the Austrian Ecolabel, which offer orientation in this exciting field.