Green finance is the new buzzword everywhere. Governments across the countries announce ambitious climate targets. Corporates publish glossy sustainability reports to create awareness. Investors sign pledges to support the clean transition organizations. However, promises are yet to be kept.

The scale of the challenge

The energy transition will require trillions of dollars worldwide including reskilling. Renewable energy projects need capital and skilled manpower. Electric mobility and new transmission networks need capital. Every solution for a cleaner future begins with investment, and the costs are increasing over time, needs to be anchored sooner.

One of the emerging solutions was green bonds. However, their market expanded rapidly and conscious investors who wanted to fund sustainable projects doubts quickly. Accusations of “greenwashing” began to erode investors’ confidence. Investors invest money to seek returns. However, clean projects often have long payback time period. For example, wind farms require years before profits flow back to the investors. Similarly, solar parks face delays due to land and other policy issues. Therefore, risks appear higher compared to conventional assets like government bond, stocks etc. so that many investors hesitate to invest.

Financial and Non-financial Institution

Financial institution like banks is too cautious while lending money to the green projects. They fear defaults in a sector where contracts lack clarity and policy instability in regard to the green project. Such instability undermines trust and deters long-term bank finance. Similarly, insurance companies are facing similar issues. Climate disasters are increasingly damaging energy infrastructures. For instance, floods, heatwave, and storms submerge dams, strain grids, and storms batter transmission lines, respectively. Thus, insurers respond it by raising premiums that raises the cost of finance for clean energy.

Carbon markets offer promise through the carbon credits. They allow firms to trade emissions and developing nations to sell credits to the carbon emitters. Yet these markets remain shallow and fragmented due to lack of standardized rules. Further, rules differ across countries. Meanwhile, global funds promise billions at different climate summits, but, unkept promises. Financial commitment that looks impressive in speeches disappear when the ground realty is checked. The famous pledge of $100 billion annually from developed to developing nations remains unfulfilled yet.

The Deeper Truth

Climate finance is not simply economics or finance. It is also politics of the respective nations. For instance, rich nations push for stricter standards whereas poorer nations demand flexibility. Negotiations often end in stalemate or delayed. Similarly, private capital flows most easily where profits are secure. For example, urban solar projects attract investors whereas rural green projects are neglected because their returns appear too modest. Thus, energy transition, then, risks becoming unequal depending urban or rural.

Geopolitics adds further complexity to the energy transitions. For instance, China plays monopoly on clean technology supply chains and finances renewable projects both in national and abroad. Similarly, the European Union is tightening green finance rules and imposing carbon border taxes. That could hit exporters and investors in Asia and Africa. The United States is pouring billions into climate tech. However, its policies swing with politics. India has issued sovereign green bonds with encouraging responses. But the scale is still too small.

Technology may democratize green finance and its market. For instances, digital platforms, retail investing, and crowdfunding may increase funding for green projects and transparency. However, it also introduces risks of scams and speculation.

Policy Action Needed

The solution lies in reducing risks on investment in green projects. Governments must provide protection to long-term contracts through guarantee. Further, it must enforce stable tariffs to get continuous cash flows to the investors. Public funds and finances must lead in de-risking private capital through blended finance. Multilateral banks like the World Bank and Asian Development Banks need to increase their scale for finances towards green projects.

Green finance is investment in resilience. It creates jobs, prevents future damage, and saves far greater costs than predicted. Floods, droughts, and storms are vastly more expensive than the precaution. The next decade will be decisive. Nations promised trillions must be mobilized, public and private actors must cooperate, and fairness must be ensured. Otherwise, the global climate change clock will run out.