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Green Finance
Green finance – any structured financial activity that has been created to ensure a better environmental
outcome. – World Economic Forum
Green finance integrates environmental protection with economic profits, emphasising “green” and
“finance”. It involves collecting funds for addressing climate and environmental issues (“green financing”),
on the one hand, and improving the management of financial risk related to climate and the environment
(“greening finance”), on the other.

The key aspect of green finance is the commitment to investing the funds raised in green assets such as:
 Renewable power generation;
 Low carbon transport/low carbon buildings;
 Sustainable water management/waste management/land use;
 Climate change adaptation;
 Resilience measures such as flood defences.
What are green loans?
Short explanation:
Green loans are loans meant for sustainable, environmentally friendly purposes, such as reducing CO2
emissions, or purposes contributing to the green transition in society such as developing new
environmentally friendly technology.
Examples: Green loans to personal customers:
 A loan for an electric car
 A loan for installing solar cells on the roof of a house
 A loan for improving the thermal insulation of a house so that less energy is spent on heating
Examples: Green loans to companies:
 A loan to build a solar park
 A loan to build zero emission buildings
 A loan to ensure growth of a company working with water cleaning technology
The predominant financial instruments in green finance are debt and/or equity, for example:
 Green bonds;
 Green loans;
 Green convertible bonds.

What is the connection between green loans and green bonds?

When a bank lends money to businesses or consumers, it needs to find the money somewhere – to fund
the loans. This can be done by issuing bonds. Green bonds are bonds where the money from the bonds is
earmarked for sustainable purposes such as funding green loans to consumers or businesses. This is also
known as green financing.
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Green bonds are popular investment objects for large institutional investors such as pension funds
wanting to support the transition to a sustainable future. To ensure that the loans funded by our green
bonds truly are sustainable, Nordea has developed a green bond framework.
There is a code of conduct that defines what constitutes a green bond. To qualify, a bond must:
 Adhere to criteria on the use of proceeds;
 Have a process for project evaluation and selection;
 Ensure proper management of any proceeds; and
 Offer detailed reporting.
Green Sukuk
In the case of a green sukuk, the financed assets must yield environmental benefits. It is well suited to
fund projects involving:
 Solar energy;
 Low-carbon buildings;
 Water and wastewater management;
 Low carbon vehicles and public transport.
A specific advantage of green sukuk it that it has the potential to attract both green investors and those
with Shariah-compliant mandates.
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AFM Exam: Possible Exam Question

Explain green finance and the difference between a green loan and a green bond. (8 marks)

Answer (Rule = 1 Mark per well explained valid point)

Green Finance (Max 2 Marks)

Green finance refers to financial products and services that support environmentally sustainable projects,
business and initiatives. It aims to channel funds towards activities that have a positive impact on the
environment and address climate change concerns.

The concept of green finance emerged as a response to growing need for sustainable development and
recognition of the role that financial institutions can play in promoting environmental sustainability.

Green loans and green bonds are two examples of instruments within the field of green finance. While
they serve similar purposes, there are some key differences between them.

Green Loan (Max 3 Marks)

A green loan is a financial product provided by banks or financial institutions to finance projects that have
specific environmental benefits. These loans are typically used to fund activities such as renewable energy
projects, energy-efficient building, sustainable agriculture, or waste management initiatives and are often
backed by government initiatives.

Some of the green features of a green loan include:

1. The loan proceeds are dedicated exclusively to finance green projects or activities.
2. The borrower needs to demonstrate the environmental benefits and sustainability aspects of the
project to qualify for a green loan in line with the Green Loan Principles.
3. Green loans are repaid with interest, like traditional loans. However, borrowers are given better
loan terms in comparison to traditional loans.
Green Bond (Max 3 Marks)

A green bond is a debt instrument issued by the governments, municipalities, or corporations to raise
capital for environmentally friendly projects. It allows investors to support and invest in sustainable
initiatives while receiving fixed income in the form of interest payments

Some of the key features of a green bond include:

1. Green bonds are typically secured and have the same credit rating as the company’s other
obligations.
2. The government often offers tax incentives to investors who invest in such bonds to make them
attractive.
3. Green bonds have a fixed maturity date, and issuers make periodic interest payments to
bondholders. At maturity, the principal amount is repaid to bondholders.
In summary, green loans and green bonds are financial instruments designed to promote environmental
sustainability. They both work in similar ways to the conventional loans and bonds with the exception that
they are instruments that are geared towards environmentally sustainable projects.
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Reference Material:

https://www.wallstreetmojo.com/sustainable-finance/

https://www.wallstreetmojo.com/green-investments/

https://www.accaglobal.com/gb/en/professional-insights/global-profession/green-finance-skills-the-
guide.html

https://www.nordea.com/en/news/what-are-green-loans