Unlike our understanding of traditional financial sector, green finance is even more concerned with whether the element of environmental impact has been factored into the design of financial game rules. This is because people discovered at the end of last century that market forces are not always effective; the available information in the market are not completely open or accurate; investors are not necessarily rational; market prices do not necessarily reflect all the information available in the market; and that many anomalies influence the behavior of markets. Furthermore, a major side effect with a huge impact is also created – environmental issues. Everyone, including the government, is completely helpless on dealing with these external factors.
The desire to improve the environment would appear quite far-fetched when we dump all the money into the typical industries in line with traditional financing and investment rules.
Here is an example: Under existing financial game rules, when an investor conducts risk assessment, she is not required to factor in green risks which are related to the environment. But here comes a problem: if a new breed of green enterprise emerges at this point, the investor will be clueless about whether there will be any risk if she invests in the venture. If you give free reign to free market mechanism, nobody will invest in greet technologies or enterprises. At the end, the market will not work because you cannot create green industries, and therefore no solutions will emerge to tackle environmental problems.
Therefore, green finance is a financial tool specifically designed to assist the development of green industries. The list includes green investment, green energy financing, green bond, green investment bank, green fund, green insurance, and even fintech.
In fact, it is quite similar to the view that “all industries will eventually become green industries” – traditional finance will ultimately become green finance. In other words, it is making the traditional financial game rules more tolerating and factoring in more elements related to environmental impact to ensure the sustainable development of industries.