EXPLORING GREEN FINANCE AND ITS IMPACT

TOPIC: EXPLORING GREEN FINANCE AND ITS IMPACT

AUTHOR: NISHA SIDDIKI

 

1. Role of Green Finance in Green Innovation:

Ma and Chang, 2023, investigate green finance and green innovation and their correlation by using data that cover 75 developing countries from 2000-2019. The study examines the influence of green financing and green innovation in developing countries. The research also considers the effects of institutional factors such as corruption and quality of governance on the relationship between green finance and innovation.

With the help of elaborative literature review, the researchers proposed three hypothesis majorly: “Green finance has a significantly positive impact on green innovation in developing countries”, “The effect of green finance on green innovation varies between countries with different type and environmental performance”, “The relationship between green finance and green innovation is moderated by corruption, political stability and government efficiency”.  The research was carried by using baseline regression model through dependent, independent as well as control variables.

The results of the study show that green finance has significantly positive influence on green innovation. It also stated that excessive environmental regulation may hinder green innovation and hence there is a need for a balanced approach. The paper recommends developing countries to prioritize the development of green finance and to create financial tools and promotion of sustainable economic and environmental growth. It also elaborates on the heterogeneous impact of green finance and need for a balanced regulatory environment.

 

2. Green Finance Initiatives in India:

Ghosh, 2022, through his study has advocated the best practices followed across the globe for promoting green finance, recent trends and future opportunities with respect to India. The researcher laid emphasis on sustainable development as a means to minimize the depletion of natural resources and encouragement towards development.

The objective of the study was to understand green finance, best practices and recent trends followed across the world related to it as well as to analyse the products and services available under green finance. It also touched upon the challenges and way forward for green finance in India.

The study conducted is descriptive in nature. It gave elaborate descriptions of green products such as green mortgage, green home equity loan, green car loan, credit card and many more. Through the study one understands India’s efforts over recent decades to address environmental degradation and sustainability and importance of substantial funding to implement initiatives. It was known that India’s environmental quality is below than that of other BRICS countries. The study also talks about how responsibility for advancing Green Finance initiatives lies with government of India and public sector as well as the private sector.

 

3. Green Finance and ESG:

Sinha and Sinha, 2022, emphasised on “green financing,” “responsible investing,” and “sustainable investing” which encompass the integration of Environmental, Social, and Governance (ESG) factors into investment decisions. They provided an extensive literature review to decode the process of Green finance and asserted the fact that green finance has gained prominence in global capital markets as investors seek to incorporate ESG practices into their portfolios to mitigate risks and shift capital from traditional to environmentally friendly assets.

Despite heightened awareness of climate change, the past decade saw record-high greenhouse gas emissions, underscoring the urgency of addressing this issue. In light of these challenges, the researchers delved into the role of green financing in fostering a resilient ecosystem, thereby ensuring the sustainability and growth of businesses. The main objective of this study was to understand the compliance and non-compliance scenario of the Sustainable stock exchange on three vital parameters: sustainability-related index, sustainability bond listing and ESG reporting.

The study used Chi-square test to determine the difference between the compliance and non-compliance scenario using the data from Sustainable Stock Exchanges Initiative. The study reveals that there is a significant difference between the compliance and non-compliance with regards to the three mentioned parameters. The study emphasises on the need for a comprehensive approach towards ESG and its effectiveness.

 

4. Green Finance and Sustainability:

Verdoliva and Vigne, 2022, discuss the evolution of corporate social responsibility (CSR) and its rising importance, especially in the urge of environmental concerns like climate change. Although there is a growing awareness, a significant portion of companies, particularly in the US and Japan, have yet to acknowledge climate change as a financial risk. Green bonds have emerged as a popular tool for financing environmentally sustainable projects and are backed by initiatives like the European Commission’s “Clean Energy for all Europeans” package.

The report introduces seven papers focusing on various aspects of green finance and corporate sustainability. Topics include the impact of the COVID-19 pandemic on European green bonds, the role of syndicated green lending on bank profitability and risk, the influence of equity analysts on firms’ green innovation, and the relationship between environmental violations and corporate bond costs in China. Other papers examine the implications of sovereign green bonds on country value and risk, as well as the integration of environmental, social, and governance (ESG) factors into bank credit risk management.

Overall, the report underscores the growing importance of green finance and sustainability practices in the global economy, with implications for both financial markets and corporate behaviour.

 

5. Green Finance in Indian Banking System:

Agarwal et al, 2021, study the role of India’s banking industry in the country’s economic growth and long-term development. Green banking incorporates practices aimed at making banks more sustainable economically, environmentally, and socially. This involves optimizing banking procedures, IT usage, and physical infrastructure to minimize environmental impact. Banks worldwide are adopting environmentally friendly policies, striving to be socially responsible and uphold ethical corporate practices alongside financial considerations.

The objectives of the paper delved to define the significance of green initiatives in achieving sustainable banking goals and to study green bank practises in India. The study covered the commercial banks having top market capitalization.

The paper gives elaborate description about green initiatives undertaken by commercial banks such as HDFC Bank, ICICI Bank, Axis Bank, State Bank of India (SBI), Bank of Baroda, Canara Bank, Punjab National Bank and Bank of India. It highlighted the initiatives of banks to promote renewable energy, emergence of eco-friendly vehicle. The study concludes with the notion that both private and public sector banks are actively participating in green banking movement. With technological advancements and exploration of alternative energy sources, banks are moving towards green banking which will not only enhance the bank’s reputation but also contribute to sustainable development.

 

6. Finance and Green Growth:

De and Popov, 2023, studied importance of countries’ financial structure & how it affects their transition towards low-carbon development. It highlights the tentative evidence that indicates role of stock markets in reallocating investment towards more energy-efficient sectors. De and Popov have explored the role of finance in shaping relationship between economic growth and carbon emissions. They assessed importance of stock markets in comparison to banks as sources of corporate funding. The research also reviews the link between growth and environmental pollution with the help of endogenous growth theory.

The paper provides an early work on this topic which focused on environmental Kuznets hypothesis. It states that pollution increases at early development stages but declines once a country surpasses a certain income level.

The paper delves upon providing robust empirical evidence of Finance and Carbon Emissions at Country, Sector and Firm Levels. To gain the results, research followed three types of regressions-OLS, 2SLS and GMM. At country level testing, the research used three variables of Entry Barriers, Equity Market Liberalisation and Current Account Liberalisation. For sector level analysis, the research took the assumption that a long-term global average better reflects the technological capabilities of an industry than its performance in an individual country. For firm level testing, De and Popov used a new firm-level data set and a plausibly exogenous policy change that reduced the cost of equity funding to firms by taking Belgium as sample.

After analysing the mentioned hypothesis, the study found that stock markets influence the adoption of cleaner technologies in polluting industries. It found that CO₂ emissions per unit of value added decline with stock market development, especially in CO₂-intensive sectors. Further it found a higher reliance on equity funding results in fewer carbon equivalent emissions, plausibly due to the implementation of greener technologies.

The paper concludes with it findings that indicate countries relying on bank-based financial system aim to green their economy by promoting green bonds and green finance initiatives. It emphasised the role of stock markets in making future growth greener by encouraging green innovations. By analysing the notional interest deduction that Belgium introduced in 2006, it provided suggestions for countries to introduce green guidelines that would improve their instrumental performance.

 

7. Green Investment and Corporate Behaviour:

Heinkel et al, 2001, through their research work delved into the influence of green investment initiatives on corporate behaviour. The study employs a combination of theoretical frameworks and empirical analysis to investigate the impact of green investments on corporate behaviour. The study assumed two types of risk-averse investors: neutral investors who ignore ethical considerations while forming their portfolios and green investors who don’t invest in firms that don’t meet their ethical criteria. In their model, the assumed three categories of firms: acceptable firms who satisfy the investment criteria of green investors, unacceptable firms that do not satisfy green investor’s criteria and reformed firms that reform their technologies at a certain cost to get accepted.

The research paper also states the equilibrium and comparative statics along with the numerical examples wherein it is found that the acceptable and reformed firms lie below the security market line. The authors state that important factor of the impact of green investing is the cost of reforming. It noted more green investors implies a growing gap between the expected returns to neutral investors and green investors in a way that favours the neutral investor which diminishes the impact of green investors.

The study contributes to our understanding of how firms can integrate environmental considerations into their decision-making processes while enhancing their long-term value creation and societal impact. It concludes with the observation that polluting industries would have high reforming cost and clean industries would incur low reforming costs.

 

8. Corporate use of Green bonds:

Bagnoli and Watts, 2020, discusses the financial benefits and implications of selling socially responsible products (SRPs) and the recent rise of green bonds as a source for companies to fund their socially responsible activities. Through the model developed in the paper, the authors focus on wholesalers, who may find it challenging to profit from SRPs due to competitive retail markets.

The paper also discusses the strategic Corporate Social Responsibility (CSR) literature, which aims to understand situations where firms benefit financially from engaging in socially responsible activities. It highlights the recent growth of the green bond market as an alternative means for companies to finance their CSR initiatives

The study examines equilibrium profits under different scenarios to understand when wholesalers choose to sell socially responsible inputs and issue green bonds. The major findings include the impact of retail market competition on wholesalers’ profitability in engaging in CSR activities. When competition is weak, wholesalers find it challenging to profit from CSR and opt not to sell socially responsible inputs. However, as retail market competition increases, wholesalers capture more consumer contributions, making it ideal to sell socially responsible inputs and issue green bonds. The study also highlights the importance of the wholesaler’s input in the production process, consumer willingness to contribute to CSR, and the visibility of CSR activities to consumers in determining the decision to issue green bonds.

 

9. Effect of Green Lending:

Del Gaudio et al, 2022, emphasize the need for a global ecological transition in response to climate change, underlining the role of public and private finance in facilitating green investments. It notes the significant increase in global public and private climate financing, reaching $632 billion in 2020.

 It is also found that the role of banking in green finance remains underexplored, particularly regarding the factors that influence banks’ participation in green lending. The study aims to address this gap by examining the relationship between banks’ propensity for green lending and their accounting profitability and risk. It also explores how the structure of green loan contracts impacts banks’ performance. It analyses data from 217 syndicated loans worldwide from 2010 to 2020 to assess the performance of banks involved in green lending.

With the help of OLS regressions with robust standard error, the research proceeded to investigate the effect of green propensity and syndicate structure on lead bank performance and risk. The findings indicate that a higher inclination towards green lending is associated with lower profitability but more moderate default and credit risk compared to banks with a less green investment approach. The study also reveals that increased collateralization and longer duration in credit policy towards green loans improve bank performance.

 

10. Responsibility Diffusion Effects and Green Credit:

He and Liu, 2018, investigate the behaviour of private capital holders in green investment. The paper underlines the responsibility diffusion theory that indicates private capital holders do not follow commercial banks issuing green credit and the signal transmission theory which implies that private capital holders may follow the commercial banks. The authors explore how corporate social responsibility (CSR) influences firms’ decisions regarding green practices and whether companies decide to adopt green credit policies independently or as a compulsion of industry norms. The paper likely examines empirical data to analyse the relationship between private capital and green credit.

He and Liu applied two-way fixed-effects model to analyse the behavioural pattern of private capital holders with panel data of 443 listed companies in China. First, they studied the co-relation between private capital investment and green credit based on Signal transmission theory where they found how financial institutions play a role in mitigating informational irregularities between firms and capital markets. Secondly, they also examined the relationship of private capital investment and green credit based on responsibility diffusion theory where they referred to green investment as “sustainable and responsible investment.” While studying the behaviour, they stated participants’ sense of social responsibility as the major factor during investing.

After testing the hypothesis, He and Liu came to the conclusion that scale of green credit issued by commercial banks influence the behaviour of private capital holders. The responsibility diffusion behaviour when moderated by solvency of company implies that strong solvency can weaken the influence of RDE and when it’s moderated by the cash flow of a company, if the green projects have more cash flow, private capital holders tend to increase the amount of investment.

 

 

SUMMARY:

As the world is evolving with each passing minute, it is important to know the impacts of this constant evolution on the environment. With growing talks at global submits such as G20 about the initiatives of decarbonisation and green finance, it becomes essential to track the development of green industries and green finance. From the above 10 research papers, one understands the different dimensions and variables of green finance and its impact. Through the above literature, it is known how green finance influence green innovation which further encourages green finance. It also talks about the green initiatives undertaken across the globe and how recent trends are shaping public as well as private enterprises as they move towards sustainability. It encompasses the innovation of various green products and its effect on the ESG goals. It addressed the impact between compliance and non-compliance scenario over sustainable stock exchanges. From understanding the corporate behaviour towards green finance to corporate use of green bonds, it provided insights into the growing influence of green finance in corporate world. The literature also gives an understanding about the green lending habits and its effects. It explores how corporate social responsibility is a determining factor in firm’s decision towards adopting green policies. Furthermore, not only corporate even banking sector is moving towards green finance through its green initiatives. To conclude, the above research papers underscores the significant growth of green finance across the globe.  

 

REFERENCES:

• Agarwal, R., Ruhela, S., & Sharma, A. (2021). Role of Sustainability and Green Finance in Indian Commercial Banking System. Pranjana: The Journal of Management Awareness, 24(1/2), 50–58. https://doi.org/10.5958/0974-0945.2021.00006.6

 

• Bagnoli, M., & Watts, S. G. (2020). On the corporate use of green bonds. Journal of Economics & Management Strategy, 29(1), 187–209. https://doi.org/10.1111/jems.12331

 

• De, H. R., & Popov, A. (2023). Finance and Green Growth. Economic Journal, 133(650), 637–668. https://doi.org/10.1093/ej/ueac081

 

• Del Gaudio, B. L., Previtali, D., Sampagnaro, G., Verdoliva, V., & Vigne, S. (2022). Syndicated green lending and lead bank performance. Journal of International Financial Management & Accounting, 33(3), 412–427. https://doi.org/10.1111/jifm.12151

 

• Ghosh, K. (2022). Green Finance Initiatives in India. IUP Journal of Accounting Research & Audit Practices, 21(2), 98–118.

 

• He, L.-Y., & Liu, L. (2018). Stand by or Follow? Responsibility Diffusion Effects and Green Credit. Emerging Markets Finance & Trade, 54(8), 1740–1761. https://doi.org/10.1080/1540496X.2018.1430566

 

• Heinkel, R., Kraus, A., & Zechner, J. (2001). The Effect of Green Investment on Corporate Behavior. Journal of Financial & Quantitative Analysis, 36(4), 431–449. https://doi.org/10.2307/2676219

 

• Ma, J., & Chang, C.-P. (2023). The Role of Green Finance in Green Innovation: Global Perspective from 75 Developing Countries. Emerging Markets Finance & Trade, 59(10), 3109–3128. https://doi.org/10.1080/1540496X.2023.2210720

 

• Sinha, A. B., & Sinha, A. (2022). Green Finance and ESG: Compliance of Global Stock Exchanges. IUP Journal of Applied Finance, 28(3), 23–33.

 

• Verdoliva, V., & Vigne, S. A. (2022). An introduction to the special issue on Green Finance and sustainability. Journal of International Financial Management & Accounting, 33(3), 379–382. https://doi.org/10.1111/jifm.12149