What is a Green Financial System?

A Green Financial System refers to a series of policies, institutional arrangements and related financial infrastructure that through loans, private equity, issuance of bonds, insurances and other financial services and instruments, such as emissions trading, steer finance towards environmentally friendly projects and activities.

 

There is broad public recognition that the global financial system needs to actively contribute to sustainable development. In recent years, the concept of green finance has become more prominent around the world, driven by the scale and urgency to finance sustainable development, and through the realisation that the public sector alone is not enough as a source of finance. The role of the private sector is key in scaling finance to meaningful levels to solve pressing climate and environmental challenges, and a green financial sector helps in shifting the financial flows to green investments.

 

Under the Paris Agreement a transparency framework is currently being developed for public and private international support, including climate finance and cooperative approaches, such as market mechanisms. The Paris Agreement rulebook is expected to be ready by 2018. The new transparency framework will create more comprehensive monitoring and reporting requirements for international climate finance, and these requirements need to be taken into account also in the development of the green financial system for Kazakhstan.

 

Examples of various types of green finance instruments and services provided by the financial sector, including financial mechanisms, financial products and structural support and services are tabled below:

 

Examples of green finance Instruments
1. Financial solutions  
Risk mitigation and credit enhancement Subordination, Guarantees, Loss Reserves
Enabling transactions (scale) Warehousing, Securitization, Leasing
Aggregation, collaboration agent ESCOs, local banks
2. Financial products  
Traditional banking products Loan, equity
Green finance Green Bonds, Green funds
Co-investment Public & institutional investors, private funds
3. Structural market support  
Market making Intermediation of environmental products (carbon credits, emission allowances, RECs)
Transparency Uphold disclosure rules for asset classes and green banking, investor disclosure requirements, act as a repository on disclosure rules
Regulation Support national regulatory mechanisms for green finance, act as a conduit to international green capital markets
Standards Uphold standards for Green Bonds, Social and Environmental risk management, GHG reduction protocols

 

 

Examples of green finance instruments

Green Bonds

Green Bonds are any type of bond instrument where the proceeds will be exclusively applied to finance or re-finance new and/or existing eligible projects or investments that have positive environmental and/or climate benefits. The pricing and return profile of green bonds still largely follows the rating of the issuer and its traditional bonds. However, standards and certification requirements for climate and green bonds are being developed by e.g. the Climate Bond Initiative, and reporting and transparency guidelines by the Green Bond Principles. Over time, as investors increasingly recognize climate risks and low-carbon growth opportunities, green bond certification and reporting initiatives will enhance the credibility of the «greenness» of the bonds, and also affect their pricing.

 

Emissions trading and carbon markets

Emissions trading is a market-based approach to controlling pollution, such as the amount of greenhouse gases emitted to the atmosphere. The main motivation for emissions trading is enhancing the cost-efficiency of achieving a desired environmental outcome, such as lower emissions. With differences in abatement costs across sectors and regions, introducing a price on emissions instead of tightening existing regulations reduces the cost of further emissions reductions.

 

Market-based schemes typically fall into one of two categories: cap-and-trade (trading) schemes and baseline-and-credit (crediting) schemes. Both types of schemes are currently in operation around the world at both national and international levels. Emissions trading systems, such as the EU Emissions Trading System (EU ETS) or the Kazakhstan Emissions Trading Scheme (K-ETS) are examples of cap-and-trade schemes, where emissions are capped over a predetermined period and participating entities are free to trade the allowances to emit between themselves. An example of a baseline-and-credit system is the Clean Development Mechanism (CDM) under the Kyoto Protocol. In a voluntary project-based baseline-and-credit scheme, the credits are awarded to projects that reduce emissions below the baseline. These credits can be sold in carbon markets, and to some extent be used also in Emissions Trading Systems for compliance. In Kazakhstan, there is also a domestic carbon market scheme, where domestic offset credits from the non-ETS sectors could be created to be used in the K-ETS.