Green Finance - more than a fad?
Sustainability. Hardly any other word has gained such importance in recent years. In the meantime, there is talk of sustainability in almost every area of life, always in a slightly different context. However, another development is unmistakable. The topic of sustainability has also, and especially, brought new impulses to the financial sector. The term, which is often used synonymously with "green" or "ecological", is not clearly defined. This poses definitional difficulties, especially with regard to financial investments and the at least equally popular term "green finance".
What is green finance actually?
A good question, to which one receives many different answers and views. Binding criteria that would clearly define the word are currently lacking. This does not make things any easier. Generally speaking, however, it refers to all financial instruments that are intended to have a positive impact, for example on the climate, social issues and society.
In addition to "green finance", it is not uncommon to hear terms such as "sustainable finance" or "social finance", all of which have a slightly different focus in their ultimate meaning. The abbreviation "ESG" for "environmental, social and governance" is particularly widespread and is increasingly used in the course of investment products to reflect the desire of many investors for more sustainability in banking transactions.
How topical is this issue anyway?
The fact that climate change is one of the greatest challenges of our time should come as no surprise to anyone by now. Accordingly, it is hardly surprising that the desire of many people for more attentiveness in relation to the environment, but also to social interaction, is growing continuously. Green finance is probably only one piece of the puzzle in the midst of a much larger overall development, which nevertheless should not be underestimated in its importance. It is to be expected that ecological approaches in all sub-sectors of the financial system will continue to gain in importance in the future.
Is there a certain politicisation taking place at the moment?
When political issues were eagerly debated at the Paris Climate Change Conference in 2015, green forms of finance also came up. They were to be one of the components limiting global warming to a maximum of two degrees Celsius. In order to achieve this goal, which in retrospect is extremely ambitious, a great deal of capital would be needed, which those responsible hoped would come from initiatives linked to green finance, among others. The next decisive step followed in August 2020 with the publication of the first framework for green federal securities.
The issues of these forms of financing pursue a variety of goals, first and foremost the promotion of clean transport systems or the faster shift towards an economy that functions largely with renewable energies. Of course, in addition to institutional investors, there are also plenty of private investors who are increasingly focusing on ecological investments. Their motivations may be primarily individual, but can ultimately be summed up in a few aspects, such as a colloquially better conscience.
Three essential forms of investment
Green finance currently focuses primarily on the following types of investment, which will now be presented briefly and clearly.
Green promissory notes: They can only be marketed with a relatively manageable volume, whereby the proceeds generated may of course only be used for ecological projects. In purely formal terms, promissory notes are loans, by the way. Nordex and Porsche are probably two of the best-known examples of companies that have already issued green Schuldscheine.
Green loans: Mostly they are issued for environmentally friendly or resource-saving investments. Sometimes the loan conditions even depend on how sustainably a company actually operates. This is then verified on the basis of specially defined criteria. The better the company does, the cheaper the money.
Green bonds: At first glance, they hardly differ from their conventional counterparts. Here, too, there are fixed or variable interest rates and binding maturities. The difference, however, is that the funds of the green bond are earmarked and thus may only be used for special environmental issues, for example. In 2017, Innogy issued such a green bond.
What conclusions should be drawn?
Green finance promises good opportunities to participate directly with one's own capital in socially and environmentally compatible projects. Even though the topic has experienced a certain amount of hype in recent years, it cannot be assumed that this will subside any time soon - on the contrary. However, interested investors would be well advised to select the respective issuers carefully. Here, too, there are still some black sheep around.
On your own account
Have you successfully developed an investment strategy for yourself in the past, perhaps even one that relates to "green energy" or "sustainable investments" and has demonstrably generated positive returns? If this is the case, please feel free to contact us and present your strategy to us. Ayondo is looking for successful investors and traders for joint product development.