How can you make the change to green finance?

What is green finance? How can your savings be eco-friendly? What is a green fund? This article will answer all your questions.

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March 28, 2022

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Did you know that €5,000 deposited in a current account at a major bank causes as much pollution on average as a round trip from Paris to New York*? It is thus clear that our savings do have an impact on the environment. So, is it possible to reconcile finance and ecology? Will sustainable development always be of secondary importance where financial flows are concerned? Since the introduction of environmental finance, this no longer has to be the case.

Green finance means financing projects and companies that have a positive impact on the environment and that are working to create a sustainable, fair and healthy economy. And the good news is that it is completely accessible to individuals, as well as companies of all sizes!

What is green finance?

Green finance is perhaps one of the most promising solutions to the climate crisis.

At a time when the financial sector is under growing criticism, the American company BlackRock, which manages $7,000 billion worth of investments, has vowed to promote more environmentally-friendly finance. Moreover, following the example of the world's largest investment and asset management company, more and more funds are confronting this issue. This (relative) ecological awareness that has been spreading through large parts of society has now also reached the finance sector, which is excellent news.

Definition of green finance

In concrete terms, the aim of green finance, also known as sustainable finance, is to further accelerate the energy transition and combat global warming via environmental finance.

The idea was popularised by the British-Canadian economist and banker Mark Joseph Carney, who raised the alarm about the financial system's excesses. Appointed governor of the Bank of England in 2012, he gave a landmark speech in 2015 to members of Lloyd's of London in which he denounced the banks’ oblivious attitude to the climate catastrophe:

“We don’t need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors, imposing a cost on future generations that the current generation has no direct incentive to fix. That means beyond: the business cycle; the political cycle; and the horizon of technocratic authorities, like central banks. (...) In other words, once climate change becomes a defining issue for financial stability, it may already be too late.”

Thus, one of the solutions proposed by the industry is green financing. This includes financing of:

  • projects and companies committed to an ecological approach: reforestation, recycling of raw materials for the manufacture of new products, etc.  
  • projects and companies committed to a social or societal approach: for example, promotion of fair trade and a fairer distribution of wealth.

There are several solutions available for savers: passbook accounts, term deposit accounts (savings accounts where the sums deposited are blocked for a certain period), bonds and life insurance.

Green funds are among the most widely-used mechanisms in green finance.

Green finance: an important strategy for action

The basic premise is that, through their investments, banks shape society and the world in which we live. Up until now, the financial sector’s carbon footprint has left a lot be desired. According to a report published in 2020 by Oxfam France, 70% of banks’ energy financing is directed to fossil fuels, which are responsible for 80% of global CO2 emissions. According to this NGO, the investment and financing choices of the four major French multinational banks are based on an obsolete system of fossil fuels: coal, oil and gas. Consequently, French banks are leading the world towards a temperature rise of +4°C due to their financing decisions.

Note: the conclusions of the NGO’s report were disputed after publication by Frédéric Oudéa, CEO of the Société Générale Group and President of the FBF: “That is completely false. These major issues, which concern us as business leaders, bankers and parents, merit serious debate and serious methods.”

Running counter-current to this historical trend, the aim of green finance is to make the sector more environmentally friendly.

In accordance with the provisions of the Energy Transition for Green Growth Act passed in 2015, green or sustainable finance must aim to effectively reduce greenhouse gas emissions by 40% between 1990 and 2030.

In line with the Paris Agreement, the French government has undertaken to support the development of this new type of financing in order to establish the country as a leader and benchmark player on the international scene.

As a quick reminder: the Paris Agreement was adopted in 2015 by almost 200 countries, and set the common goal of:

  • limiting the global temperature increase to 2°C
  • achieving zero net emissions between 2050 and 2100

Green funds: a tool for green finance

Green funds are one of the most effective financial sector mechanisms for mitigating global warming. Two labels have been developed to make these funds easier to understand and classify. The aim is to democratise green funds while focusing on transparency.

The first type of funds come under the Greenfin label. Their purpose is to accelerate the energy transition in order to slow down global warming as much as possible. The label not only ensures that investors make an effective contribution to the financing of the energy transition, it also represents a guarantee of credibility and visibility for green investment funds.

The label's criteria are based on three key areas, guaranteeing a real contribution to the transition:

The Greefin label was created by the Ministry of Ecological and Solidarity Transition in recognition of close to 55 funds with assets of around €17 billion.

Among these Greenfin-certified funds are green or environmental funds, which invest in companies whose core business is environmentally-friendly or which generate a significant proportion of their turnover from so-called “green” activities. This may include, for example:

  • environmental industries
  • energy and ecological transition solutions
  • renewable energy providers
  • Green Tech businesses
  • certain companies involved in the health or well-being sectors

Predominantly invested in stocks and bonds, these types of companies have been increasing since the early 2000s, although their share of the European investment fund market has not yet exceeded 1%.

A more recent development is unlisted green asset funds, which invest in:

  • infrastructure
  • private equity
  • real estate
  • forests, etc.

💡NB: Since the signing of the Paris Agreement, unlisted asset funds have been experiencing a meteoric rise.  According to the Novethic website, there are 223 in Europe, representing nearly 57.6 billion in January 2019.

Greenfin-labelled funds also include green bonds.

The green bond market for financing renewable energy

The market for Green Bonds is also expanding rapidly. According to the Climate Bonds Initiative, they amounted to USD 168.5 billion in 2019. Issued by major institutional players such as the World Bank and large companies, their purpose is to finance projects focused on:

💡NB: France issued €13 billion in Green Bonds in the first half of 2019.

ISR-labelled funds

The acronym in ISR-labelled funds stands for Investissement Socialement Responsable (Socially Responsible Investment - SRI).

These include funds that not only select companies based on financial criteria, but that also take into account ESG criteria. In this way, investors can invest in organisations that uphold environmental as well as social values in order to promote the development of a healthier and more sustainable society. As at December 2019, these funds accounted for nearly €120 billion in assets.

💡 NB: Companies offering their employees a PERCO (Collective Retirement Savings Plan) or a PEE (Company Savings Plan) are obliged to include at least one SRI fund. Since January 2020, under the French Pacte law, all life insurance contracts must also incorporate a fund of this type, as well as a Greenfin-labelled fund as of 2022.

How can individuals access green finance?

Individuals who would like to access green finance and put their savings to work for sustainable development should rest assured that they can do so! The sector is not solely for organisations or the wealthy. Everyone can get involved!

There are several options available, such as investing in Undertakings for Collective Investment in Transferable Securities (UCITS), investment companies with variable capital (SICAVs), mutual funds (FCPs) or green bonds, by means of:

  • an ordinary securities account
  • a Stock Savings Plan (PEA), if the SRI fund is eligible
  • a life insurance contract
  • an employee savings plan or group pension plan, if offered
  • a retirement savings plan

However, the easiest way is to join a green neo-bank.

Green neobanks

Would you like to place your money in a green neobank but don't know which one to choose? Below are a few ideas.

First of all, what exactly is a green neobank? Following the example of ethical banks, the aim of green neobanks is to redefine the parameters of banking products and demonstrate that green products can work commercially by supporting projects that do not harm the environment. This is how stakeholders' savings are converted into green savings.

Some examples of green neobanks:

  • Green-Got: created in 2020 and with nearly 4,000 customers, Green-Got offers all the services of a neobank, with the added bonus of a “green” footprint. The organisation aims to contribute to reducing the carbon footprint by giving its customers the opportunity to invest their funds in green bonds. Like any financial institution, the available balance in a customer’s current account is invested by the bank in order to make a profit, however, without ever investing in fossil fuels, unlike most other banks. In addition, the neobank offers its customers the option to participate in the rounding system to finance the planting of trees, as well as the sponsorship system, to help protect the planet.  
  • Hélios: this bank has pledged not to finance sectors that threaten our environment, biodiversity or human beings, i.e. coal, oil extraction, as well as armaments, or operations involving intensive breeding or chemical pesticides. All the money invested is allocated to practical projects aligned with the transition to a low-carbon economy, such as those associated with sustainable agriculture, waste treatment or the conservation of natural ecosystems.
  • Goodvest: this organisation offers to build a portfolio tailored to your specific situation, objectives and values via funds managed by pioneering responsible investment companies.

When savings become responsible

Greening your savings means becoming a financial player in the fight against global warming.

To this end, the Rift application was created to raise awareness of the social and environmental impact of depositing funds in a bank. The principle is simple: to inform the general public about how banks use their money. To obtain this information, users simply create an account, indicate the funds at their disposal, in which institution they are held and via which types of products. This is a first step to better understanding the impact of our finances.

In short, the aim is to invest in so-called “low-carbon” projects and actions, i.e. those that are low in carbon emissions and other greenhouse gases. To make it easier to identify these projects, the Low Carbon Label, created by the Ministry of Ecological Transition, offers funding options for local projects to reduce greenhouse gas emissions. In this regard, it is helping to support the ecological transition at the regional level.

In 2019, European companies allocated €124 billion to new low-carbon investments (source: study published by the non-profit organisation Carbon Disclosure Project), almost half of which was spent on research and development. Below, at the top of the list, are the sectors that have received the largest share of these investments:

  • electric vehicle technologies (€43 billion)
  • renewable energy (€16 billion)
  • energy network infrastructure (€15 billion)
  • demand-side management programmes for intelligent energy (€8 billion)

Another way of participating in this ecological transition is by investing savings in a responsible way. This is the objective that Goodvest has set itself. This new player wants to combine responsible investment with the search for yield and transparency, in order to finance the world of tomorrow.

To achieve this, the company is building the first-ever financial portfolios aligned with an estimated maximum increase of 2°C of global warming, which strictly excludes harmful sectors such as fossil fuels or arms. With this 100% digital solution, investors can access their investments, their carbon footprint and their composition at any time, thus putting an end to the lack of transparency in the ultra-polluting savings sector.

Greening your company's accounting practices

However, it’s not just individual’s savings and finances that lead to pollution, it’s also the accounting practices of small and medium-sized businesses. The accounting of companies also has major consequences!

Measuring the emissions of your employees’ expenses

One area to explore is to measure the emissions of your employees’ expenses. There are two accounting apps that you can use to do so, iPaidThat and Pennylane.

So what can these apps do for you?

  • iPaidThat: this app automatically collects your supplier invoices and compares them with your bank so you don’t miss anything and can monitor your cash flow in real time.
  • Pennylane: this platform automatically collects data on your various financial flows, enabling you to keep track of your accounts on an ongoing basis.

Once each expense has been itemised, the Greenly software will massively reduce the time and costs associated with your climate commitment by precisely measuring the emissions behind each expense in real time in order to calculate your carbon footprint and propose appropriate solutions.

🎯Objectif: the coveted (and essential!) achievement of carbon neutrality.

The need for a carbon assessment

What is carbon assessment? Carbon assessment is a tool for the accounting of GHG emissions (water vapour, carbon dioxide, ozone, methane, etc.) generated by the manufacture of a product or the performance of an activity. Designed to provide information on the harmful effects of human activity on the environment, it enables companies to implement action plans to reduce these emissions, while making significant savings and enjoying numerous benefits.

Banks and their customers’ carbon footprint

From now on, banks will be required to publish the carbon footprint generated by their customers.

At the end of 2019, the European Union adopted the SFDR (Sustainable Finance Disclosure Regulation). It concerns the “sustainability-related disclosure requirements in the financial services sector” and all financial actors (banks, insurance companies, management companies, financial advisors, etc.) offering financial services in the EU.

The SFDR regulation divides products into three categories:

  • Products without sustainability objectives
  • Products with environmental or social characteristics (Article 8)

To date, all products categorised under Articles 8 and 9 are subject to specific disclosure requirements under the SFDR. In addition, all products must define the integration of ESG risks and the assessment of impacts on profitability as well as the consideration of major adverse impacts (Article 7).

For info: the SFDR Regulation was conceived following the creation of the working group TCFD (Task force on Climate-Related Financial Disclosures), at COP21 in 2015. Its mission is to promote financial transparency related to climate risks while ensuring the markets clean up their act, and, especially, to highlight the financial risks associated with climate change so that investors, borrowers, insurers and shareholders can make more informed decisions.

Composed of 32 professionals and chaired by former New York City Mayor Michael Bloomberg, the TFCD produced a report in 2016 with recommendations based on 4 key areas:

  • governance
  • strategy
  • risk management
  • indicators and objectives

The report specifies that this information should be incorporated into companies' financial reports rather than in their extra-financial report.

Published in 2017, the report emphasises 2 key points:

  • Climate change will cost the economy $2.3 trillion
  • Reporting is a vital tool for reducing risk because it allows stakeholders to assess its financial cost.

*Source: Rift application. When an individual deposits money in a bank, the money never lies dormant. It is invested by the custodian bank and is predominantly used to finance fossil fuels, which are responsible for significant greenhouse gas (GHG) emissions. By stating that €5,000 deposited in a current account at a major bank causes as much pollution on average as a round trip from Paris to New York, this means that the GHG emissions generated by the investment of this sum are equivalent to those emitted by a long-distance flight.

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by
Alexis Normand

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