LEGAL AND POLICY CONSIDERATIONS FOR UTILIZING GREEN FINANCE AS A TOOL FOR DRIVING THE ENERGY TRANSITION
INTRODUCTION
Growing concerns over environmental degradation and climate change have thrust sustainable development into the global spotlight. Economic expansion has led to alarming levels of harmful emissions, resource depletion, and ecological decline, resulting in rising temperatures and more frequent extreme weather events. Despite international efforts, progress towards sustainable development goals has been slow, exacerbated by a significant global investment gap of at least $2 trillion in sustainable projects between 2021 and 2023, highlighted by data from the International Renewable Energy Agency (IRENA) in 2020. The COVID-19 pandemic has further widened this gap, particularly in renewable energy investment. In response, green finance has emerged as a potential solution, attracting increasing attention. Understanding the legal and policy considerations surrounding green finance's role in driving the energy transition is essential to effectively address the urgent global challenges.
GREEN FINANCE AS A TOOL FOR DRIVING THE ENERGY TRANSITION
Finance serves as the lifeblood of burgeoning economies, fuelling trade, innovation, and enterprise. In the pursuit of a zero-carbon world, as outlined in agreements like those from the United Nations Climate Change Conference (COP26) in 2021, ample financial capital becomes imperative to drive various green initiatives forward. Green finance emerges as a critical tool in achieving this objective, encompassing a wide array of activities, products, and services aimed at fostering sustainable impact on society and the environment. With its unique blend of traditional lending and environmental regulation, green finance facilitates borrowing, while offering regulators a means to mitigate environmental degradation. It plays a pivotal role in spurring green technological innovation, thereby advancing goals such as carbon peak and net-zero emissions. The global green finance market, valued at approximately US$ 3650 billion and projected to surpass US$ 22,485.6 billion by 2030 according to Allied Market Research (2022), underscores the potential of green financing to address objectives set forth in COP26. Green bonds, a prominent aspect of green finance, have emerged as a popular tool, with global issuance surpassing US$1 trillion by the end of 2020, signalling a growing momentum towards sustainable investment practices.
Asia, particularly Southeast Asia, stands as a champion of green finance, with significant projects funded by institutions like the Asian Development Bank (ADB). Notable endeavours include the 2019 Cambodia Solar Park Project (USD 26.7 million) and the Waste to Energy Project of Greater Male (USD 151.13 million). Additionally, investments in Green, Sustainability, and Social Bonds by countries like Georgia (USD 20 million) and Thailand (over USD 1.67 billion) have further propelled green finance in the region. The ADB's ASEAN Catalytic Green Finance Facility (ACGF) supports environmental and climate-related projects, particularly amidst post-pandemic economic recovery efforts in ASEAN. In Central Asia, countries like Kazakhstan and Uzbekistan witness similar green initiatives funded by entities like the Green Climate Fund.
India recorded green finance flows totalling USD 38 billion during 2016-18, sourced mainly from domestic entities, with power projects and energy efficiency receiving over 80% of investments. In the Middle East, green bonds issuance reached USD 6.4 billion by mid-2021, supported by approximately 12 climate funds totalling USD 1317 million. Egypt and Morocco are key beneficiaries, with investments directed towards clean energy and water resources management. Regional institutions like First Abu Dhabi Bank and the Islamic Development Bank have issued green sukuk and bonds, reflecting the rising interest in green finance.
In Latin America, the 'Green Finance for Latin America and the Caribbean' platform facilitates initiatives administered by entities like the World Bank and Inter-American Development Bank. Brazil and Mexico received over 50% of total green finance flows, with Chile issuing the region's first sovereign green bond. Despite contributing minimally to global emissions, Sub-Saharan Africa faces disproportionate impacts from climate change, necessitating significant green financing. The Green Climate Fund, Least Developed Countries Fund, and Clean Technology Fund have been pivotal contributors, addressing challenges exacerbated by poverty, conflict, and urbanization. While the benefits of green finance are evident, effective laws and policies are essential to guide its implementation and maximise its impact.
LEGAL AND POLICY CONSIDERATIONS FOR UTILIZING GREEN FINANCE AS A TOOL FOR DRIVING THE ENERGY TRANSITION
In driving the energy transition through green finance, policymakers should bear in mind several policy considerations, to ensure its effective utilisation:
Establishing an Enabling Financing Environment for Renewables: Creating a conducive financing environment supported by credible policy tools like feed-in tariffs and risk guarantees is crucial. While examples like Brazil showcase successful implementation, challenges in countries like Nigeria highlight the need for consistent political commitment and policy stability.
Diversifying Financing Instruments: Prioritizing financial instruments that mobilize private investment, such as blended finance and risk guarantees, is essential. Policymakers must carefully assess the advantages and disadvantages of these instruments, considering their evolution over time, and ensure regulatory support for redirecting capital towards clean energy.
Promotion of Innovation and Technological Advancement: Establishing supportive legal frameworks for research and development is vital for driving innovation in renewable energy. Collaborative efforts with organizations like the International Renewable Energy Agency (IRENA) can accelerate technological advancements and cost reductions in the sector.
Transparency and Accountability Mechanisms: Robust transparency and accountability mechanisms are necessary to maintain integrity and investor confidence in green finance markets. Policymakers should prioritize implementing transparent frameworks and accountability measures, to facilitate informed decision-making among investors.
Protection of Investors and Stakeholders: Strong regulatory frameworks are needed to safeguard investors from misleading green financial products. Regulatory actions, as seen in the U.S. SEC's enforcement against greenwashing, underscore the importance of investor protection measures.
International Cooperation and Harmonization: Establishing bilateral and multilateral agreements fosters global collaboration in mobilizing resources for sustainable development projects. The increasing international climate finance flows highlight the significance of such cooperation in achieving shared objectives.
Information Disclosure: Prioritizing standardized and usable information disclosure mechanisms is essential for green finance development. Financial regulatory authorities can mandate disclosures on environmental performance, aiding investors in making informed decisions and driving the growth of green finance.
CONCLUSION
Green finance and socially responsible financial mechanisms are vital in tackling environmental degradation and climate change. Their success is hinged on the enactment of robust policies. Policymakers should prioritize various actions. Firstly, they must create policies fostering a conducive financing environment, including credible tools like feed-in tariffs. Secondly, mainstreaming financing channels, particularly through institutions like the Bank of Industry, can mobilize funds for renewable energy ventures. Additionally, diversifying financing instruments, promoting innovation, ensuring transparency, fostering international cooperation, and safeguarding investor interests are all crucial. Through effective policy implementation, policymakers can leverage green finance to facilitate the energy transition, paving the way for a sustainable future.