What is green finance? Green finance is the financing of investment that encourage the development of a more sustainable economy. Green finance also refers to financial support for green growth. What is green growth? It is promoting economic growth and development while safeguarding the use of natural resources in a sustainable manner.
Green financing instruments have emerged as a new and popular asset class, especially in developed countries. Whether called green finance, sustainability finance or the expanded scope of environment, social and governance (ESG) finance, the provision of financing facilities tied to environmental or broader social good activities is now common staple in Western Europe and the US. Investors are even willing to accept lower yields on the investment instruments.
Green finance transactions are essentially plain vanilla instruments with at least two key features added: (a) proceeds of the transaction are used exclusively for green projects, and (b) the green element is usually subjected to independent third party review and certification. Investors in plain vanilla financing instruments can also invest in green financing; dedicated green investors will not normally invest in “non-green” plain vanilla transactions. Investors look to boost their green credentials by investing in the new asset class. That is why it is said that the green financing market is deeper and more liquid than the plain vanilla financing market.
The rapid growth of the green finance asset class bodes well for the environment and society in general. It provides an incentive for companies to invest in green initiatives. Green financing focuses more on the sustainability of the project being financed rather than of the issuer itself, but in the process, the proponents will gain access to cheaper and deeper pool of capital.
The development of green financing is a recognition that society now demands that companies, whether private or public, serve a social purpose. Every company must not only deliver financial results but also show positive contribution to the environment. As an example, in January 2018, Laurence D. Fink, Blackrock CEO, one of the most influential global investors, wrote a letter to the world’s largest public companies, telling them they need to contribute to society to receive his firm’s support.
Green financing has already reached the Philippine shores although the transactions are few and far between. Green transactions are now getting completed in either foreign currency or in Philippine peso. The Securities and Exchange Commission is one of the leading lights in the development of the Association of Southeast Asian Nations (ASEAN) Green Bond Standards (GBS). The main purpose of this GBS is to provide guidance on the specific application of international Green Bond Principles across ASEAN. The objective is to enhance transparency, consistency and uniformity of ASEAN green bonds and contribute to the development of this new asset class within the region. This recent issuance of the ASEAN GBS is expected to accelerate the development of the Philippine Green financing market.
Realizing the significance and relevance of green financing, the Financial Executives of the Philippines Foundation Environment Committee chaired by Metro Pacific Tollways Corp. President Rodrigo E. Franco adopted as an advocacy the promotion of this new asset class in the country. A forum on green financing, the first in the country was held last month, aimed at educating Philippine companies on the intricacies of green finance. The forum had three resource persons who are intricately familiar with the new asset class: Herry Cho, Head of Sustainable Finance for Asia Pacific of ING Bank; SEC Commissioner Ephyro Luis Amatong, who played a key role in the development of the ASEAN Green Bond Standards; and Aileen Theresa Zarate, a senior investment officer at the International Finance Corporation which very recently issued peso-denominated green bonds. The three speakers provided vital information that will help potential issuers, underwriters, investors, advisors and consultants undertake their respective Green Finance transactions.
The FINEX Environment Committee recognizes that a lot more things need to be done to make the green finance asset class an important component of the Philippine financial market. Let’s support green financing!
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Flor G. Tarriela is Chairman of Philippine National Bank. She was the first Filipina Vice President of Citibank N.A. and was formerly Undersecretary of Finance when Jose T. Pardo was DOF Secretary. She is a natural farmer and an environmentalist.