Green finance tools and opportunities for their application

Introduction

In the context of global climate change and growing demand for environmentally friendly technologies, green finance is becoming a key area of modern economic development. It is not only a set of financial instruments, but also a set of mechanisms aimed at supporting sustainable development, reducing environmental risks and adapting to climate change. The importance of green finance is growing every year, covering more and more sectors of the economy and having a significant impact on international and national sustainable development strategies.

Chapter I. The concept of green finance and its instruments:

1.1   Green finance is the strategic investment in projects, products and services aimed at achieving environmental sustainability, social justice and economic growth. The term was first used by American economist Richard Sandor in 1992 in a course delivered at Columbia University[1]. He argued that green finance, which focuses on financing projects that hinder climate change, can be the primary mechanism for reducing greenhouse gas emissions and transitioning to sustainable and environmentally friendly economic growth. Green finance combines economic and environmental interests in an effort to minimize negative environmental impacts while supporting the long-term development of society.

Green finance covers a wide range of financial instruments and initiatives, including green bonds, sustainable investment funds, microfinance for green projects, public subsidies and private investment in environmental start-ups. These financial resources support areas such as renewable energy, energy conservation, waste management, water supply and ecosystem restoration.

The main objectives of green finance include:

1. Reducing carbon footprint: Financing projects that reduce greenhouse gas emissions and combat climate change. This may include developing solar and wind energy, deploying carbon capture technologies, and supporting reforestation projects.

2. Supporting environmental innovation: Investing in new technologies and practices that promote more efficient use of natural resources and reduce environmental burdens. Examples include developing environmentally friendly vehicles, implementing energy-efficient solutions in industry, and constructing green buildings.

3. Social justice: green finance also focuses on addressing social issues related to the environment. This can include supporting initiatives to provide access to clean water and energy for vulnerable communities, as well as projects that address climate change adaptation in developing countries.

4. Sustainable Economic Development: Funding for projects that create jobs and stimulate economic growth while protecting the environment and managing natural resources. This may include supporting sustainable agriculture, developing ecotourism, and promoting environmentally friendly production processes.

1.2 Main instruments of green finance

Types of green finance instruments. All green projects require a large amount of financing, while in most cases green business models and projects are high-risk and unconventional. Consequently, traditional financing methods may not be commercially attractive or applicable.[1] To address this problem, new financing instruments have been developed in global practice, focused on the “green” economy: “green” loans, “green” bonds, green investment funds, carbon exchanges, asset-backed securities (ABS), income-generating companies (Yieldco), “green” banks. Let's consider each of these instruments in more detail.

“Green” loans are debt borrowings of any type, the cash proceeds of which can only be used to finance, in whole or in part, new and/or existing projects that qualify as green projects.[2]

Figure 1. Types of green finance instruments

The Green Credit Principles (GCP) provide a rigorous and transparent framework that allows market participants to clearly define the characteristics of green credit based on four key elements: use of funds, project appraisal and selection procedure, management of funds and reporting. The main areas covered by green projects include renewable energy (generation, distribution, products, equipment), energy efficiency (buildings, batteries, district heating systems, smart grids, appliances and products), pollution prevention and control (emission reduction, greenhouse gas control, soil remediation, waste prevention and recycling), sustainable management of natural resources and land use, conservation of terrestrial and aquatic biodiversity, sustainable management of natural resources and land and water resources, sustainable use of natural resources, and sustainable management of water resources. 

“Green” bonds are bonds of any type, the cash proceeds from the placement of which can only be used to fully or partially finance new and/or existing projects that meet the requirements for ‘green’ projects. As a result of the implementation of “green” projects for which green bonds are issued, there should be obvious environmental benefits, the amount of which is assessed by the issuer using qualitative  and quantitative criteria. The list of production sectors, for the financing of which green bonds are used, is similar to the requirements of green loans.

Green bonds are regulated according to the same norms as other fixed-income securities traded in the organized market.

Depending on the mechanism of cash flow formation, the following types of bonds are distinguished:[1]

• standard bonds, the proceeds of which are allocated to green development tasks;
• “green” revenue-linked bonds - non-recourse bonds to the issuing organization, where the subject of collateral and credit risk are cash receipts at the expense of income, remuneration, taxes, etc., the funds from the placement of which are used to finance/co-finance “green” projects, both related and unrelated to the sources of these cash receipts;
• “green” project finance bonds - securities with or without recourse to the issuer, aimed at financing one or more “green” projects, the credit risk of which is related to the implementation of the projects themselves;
• “green” securitization bonds - bonds secured by one or more projects, including but limited to secured bonds, asset-backed securities, asset-backed securities, mortgage-backed securities and others.

Some researchers cite a classification of green bonds depending on the type of project:[1]  

• Climate Bonds - bonds aimed at projects in the field of adaptation and mitigation of climate change;
• Blue Bonds - bonds aimed at projects in the field of water use and preservation of aquatic ecosystems;
• Ecosystem Green Bonds (Ecosystem Green Bonds) - bonds aimed at projects within the framework of sustainable green initiatives aimed at preserving the ecosystem;
• Forest Bonds - bonds aimed at forestry projects with low ecosystem impact;
• Social Impact Bonds (Social Impact Bonds) - bonds aimed at projects whose main goal is to achieve a social impact;
• Conservation Impact Bonds - bonds aimed at projects whose main goal is to achieve conservation results;
• Development Impact Bonds - bonds aimed at projects within the development program;
• Bonds for projects related to biodiversity conservation and improved protection of flora and fauna (Wildlife Impact Bonds).

Despite the existence of approved in a number of countries Principles for issuing “green” bonds, this financing instrument is one of the least transparent and certain.[2] The use of green bonds assumes a high level of reputation of the issuer, showing its positive solvency and credit history, as well as a high professional level of specialists.[3]

Thus, in 2017, China approved new Principles of Green Bond Issuance, which prohibit the issuance of green bonds by companies in industries with high energy consumption and pollution, or not included in the priority industries under the Industrial Development Program. The issuer undertakes to strictly comply with the requirements to provide detailed information on the level of environmental impact of its activities both at the time of application for issuance of such bonds and during the period of their circulation, and undertakes in writing to use the funds from the placement of green bonds only to finance the implementation of green projects that meet the established requirements in accordance with the principles.

According to a study by TheCityUK and BNP Paribas, the total value of green bonds outstanding in 2021 was $511.5 billion.[1]

Green bonds are often referred to as asset-backed securities (ABS).[1] This type of security is a tradable security where the assets are rooftop solar PV collectors or other renewable energy technologies backed by cash flows in the form of electricity payments. As a result, credit risk is reduced and the company gains access to resources of institutional investors (pension funds and insurance companies, etc.) that invest mostly in projects with a stable level of profitability, and the opportunity to use them later for reinvestment in new RES projects.[2]

“Green” fund - a mutual fund of investments or other investment vehicle that carries out activities to invest in socially conscious companies or companies that directly promote social responsibility through the use of standardized ‘green’ assets. The portfolio of most green funds in Europe consists predominantly of equities, but recently, with the introduction of green bond funds in 2015 and further development of green bond funds, the market is gradually diversifying. For emerging markets, the first green bond fund was launched in 2017 through the joint efforts of the World Bank Group's International Finance Corporation (IFC) and France's Amundi.[3]

Greenhouse gas emissions trading systems (ETS), or carbon exchanges. Greenhouse gas emissions vary around the world: emissions in developed countries are much higher than in developing countries. As a result, developing countries put up for sale on specially organized sites a part of their greenhouse gas emission quotas, which are purchased on a market basis by those countries whose emissions exceed the norm. It should be noted that the cost of emission allowances is quite low, with a global average of less than $12.5/t in 2018, ranging from $0.5/t CO2-eq. in Massachusetts to $99/t in the UK. 15 In Kazakhstan's ETS, the price as of April 1, 2022 was $1.08/t CO2-eq. As a result, the total turnover of the global carbon market as of April 1, 2022 was $251 billion.[4]

Yield companies (Yieldco). - are public companies in the form of a subsidiary of a corporation, created by forming a portfolio of RES projects and selling shares to investors seeking stable income, but not satisfied with the low level of yield of the bond market. Operating RES facilities are risk-free assets, the income from which is generated in the form of payments for electricity generated. The name “income”, is due to the fact that most of the dividends are distributed in the form of quarterly bonuses to equity holders. Traditionally, the size of assets to create a Yieldco averages $500 million, and the IPO cost is $150-200 million.[5] The existence and effective functioning of profitable companies is closely related to the presence of certain institutional conditions and quality of regulation, under which the investor is ready to consider investments in RES as a way to diversify portfolios and hedge the risk of volatility, based on the fact of independence from raw materials, unlike fossil fuel power plants. A green bank is a financial and credit institution, usually created by the state or by attracting funds from international, regional and national financial institutions, which allocates funds to the private sector for the implementation of projects that result in additional investments in green markets. At the same time, a new financial institution is not necessarily created - a green investment bank can be created by reorienting existing development banks to prioritize support for green infrastructure development, energy conservation, resource conservation and pollution reduction projects. Green investment banks are an organization whose task is to reduce the risks of investing in green projects and stimulate investment, mobilizing private investment using limited public capital. The focus of green banks has traditionally been on renewable energy, but it can still cover other environmental areas, including sustainable infrastructure, green building and biodiversity conservation. As noted in studies by the Organization for Economic Cooperation and Development, green banks use loan loss provisions, guarantees, insurance, and debt subordination as risk mitigation tools. As a result, the creation of “green” banks contributes to reducing the risks of investing in climate projects and implementation of “green” investment projects.

Chapter II. The role of Uzbekistan in the context of green finance.

2.1 Current status of green finance in Uzbekistan.

Uzbekistan has seen a gradual increase in green finance activity. Previously, it was mainly represented by individual projects and grants from international financial institutions, but in recent years, new instruments such as green loans and bonds have emerged. Thus, on June 9, 2021, during the visit of a delegation of the European Bank for Reconstruction and Development (EBRD) headed by First Vice President Jurgen Rigterink, a cooperation agreement was signed with Uzpromstroybank within the framework of the EBRD's Green Economy Financing Facility program. Under the agreement, the EBRD will provide a credit line of up to 25 million dollars to support green initiatives in Uzbekistan.[6]

In September 2021, Uzpromstroybank signed an agreement with the International Finance Corporation on a $75 million credit line aimed at climate finance and increasing lending to small and medium-sized enterprises (SMEs) in Uzbekistan on a 50/50 basis.[7]

On June 20, 2022, the Interindustry Energy Saving Fund under the Ministry of Energy of the Republic of Uzbekistan and AKIB “Ipoteka Bank”, cooperating on the allocation of green consumer loans, signed a General Agreement, according to which the Bank will issue a total of 54 billion soums of green consumer loans for the purchase of energy-saving technologies and equipment, including renewable energy sources, at the prime rate of the Central Bank for a period of 5 years.[8]

In turn, the Government is also actively seeking new sources of development financing, including through the introduction of innovative and non-traditional financial instruments. Thus, in July 2021, the Government of the Republic was the first in the CIS region and one of the first in the world to place government bonds aimed at targeted SDG financing - Sovereign SDG Bonds. The volume of the issue amounted to 2.5 trillion soums (about 235 million USD) at 14% for a period of 3 years.[9] The funds received will be earmarked for the implementation of activities and projects aimed at achieving 9 specific national SDGs, among which are green development goals.

As can be seen, green instruments are characterized by significant diversity, allowing to expand opportunities to attract investment in enterprises without government involvement, to benefit financially from green activities and to reduce/prevent pollution of our environment.

Conclusion

Green finance is an important and multifaceted tool for achieving sustainable development and combating climate change. The main conclusions from the analysis of key aspects of green finance are as follows:

• Variety of instruments: Green finance includes a wide range of instruments such as green bonds, loans, funds and carbon exchanges, each of which plays a role in supporting environmentally friendly projects. These tools make it possible to raise capital for the implementation of initiatives that contribute to reducing the carbon footprint and improving the environmental situation.

• Growing interest and activity: There has been a significant increase in interest in green finance in Uzbekistan. The emergence of new instruments such as green loans and bonds, as well as successful cooperation with international financial institutions, indicate the country's desire for sustainable development and the introduction of environmentally friendly technologies.

• Overcoming barriers: Despite the positive trends, there are barriers such as the high cost of green projects and the lack of transparency in some financial instruments. It is important to continue to develop and improve financial mechanisms, as well as to increase the level of transparency and trust in green finance.

• International cooperation: Successful implementation of green projects often requires international cooperation and exchange of experience. Cooperation with international financial institutions and partners helps to attract additional resources and expand opportunities for the implementation of sustainable initiatives.

• Future and prospects: In the future, it is important to focus on integrating the principles of sustainable development into the financial system, developing new financial instruments and actively supporting green projects. This will not only improve the environmental situation, but also contribute to long-term economic growth and social justice.

Green finance continues to evolve and represents a key element in the implementation of global and national sustainable Development Goals. The effective use of financial instruments and international cooperation will contribute to the successful implementation of environmental initiatives and the achievement of sustainable economic growth.