As 2015 witnessed governments across the globe acknowledging the urgency to tackle the problem of climate change, finance came to be seen as crucial in realizing the vision in the United Nations Sustainable Development Goals (UN-SDGs) and the Paris Agreement on climate change. Since then, green finance has gained leading importance amidst the policy-based discussions among international organizations and governments. Although there has been rising interest among academic researchers, there is no consensus on a definition of the term ‘green finance’, and it is far from having any conceptual clarity. However, the efforts of numerous bodies to pen their respective definition of green finance show that it is a broad phenomenon which represents a wide-ranging challenge to the traditional constructs of finance and financial law. Additionally, studies have shown that green finance is closely associated with concepts such as climate finance and sustainable finance, and organizations use these terms interchangeably. Summarily, the definitions employed especially by the International Finance Corporation (IFC), the United Nations Framework Convention on Climate Change (UNFCCC) and the G20 Green Finance Study Group characterise the internalisation of environmental externalities within the financial system in order to foster investments. This internalisation addresses concerns surrounding climate change and respects the planet’s equilibrium. One study in particular highlights that the ambiguity embedded in these definitions hampered the purpose of fostering investments that actually have the potential to provide environmental benefits. Especially the absence of a general definition of ‘green’ has been noted to be a key barrier to green investing because the scope of this definition determines the nature of assets and affects transparency. Various stakeholders (such as banks, investors, financial service providers, policy makers and regulators, academia and NGOs) are trying to describe the term, sometimes using substantially diverging approaches. Amidst this wide array of deliberations surrounding green finance, this post looks into the question of whether the conceptual murkiness of green finance is a result of its recent emergence or a continuation of a deeply discordant political context rooted in the initiatives of UNFCCC to tackle climate change. I close that, perhaps, it is a bit of both. I present my reasoning on two distinct points.

First, green finance as an idea and in practice remains immature and dubious. This is because, as a recent phenomenon, it has to balance the irreconcilable differences between the anthropocentric outlook embedded within the financial realm and ecocentric outlook propagated by environmentalists. The ‘quiet revolution’ seeking to integrate sustainable development into the fabric of the financial system is led in collaboration with market actors. This is essential; however, it is important to not lose sight of the fact that the functioning of the financial system is an economic matter. With a perspective that is dominantly shaped by the traditional constructs in economics, market players are continuously trying to manoeuvre their way around the regulatory framework. This trickles into the goals of financial regulation as well. Figuratively, the financial system understands a language different than the one used in the various international negotiations surrounding climate change and other environmental concerns. Consequently, green finance is getting lost in translation. Oren Perez aptly summaries,

To a large extent one can view the emergence and transformation of the field of green finance as the product of two conflicting narratives: neo-liberal capitalism with its emphasis on free trade, deregulation and small government and the emergence of globally oriented civic networks that highlighted the adverse social and environmental repercussions of the neo-liberal order.

(emphasis added)

Hence, one of the main problems with green regulation in the financial sector has been that financial and environmental policy approaches have often not been coordinated. A study that aimed to examine the vigorous attempts in defining "green" has noted that the advances of explaining it see green finance as a goal in itself and not as a means to a goal to tackle the growing environmental concerns. In other words, ‘green’ is defined by what is financed, such as in case of investments into green technologies or companies and not by what is achieved, eg, a specific environmental impact. Thus, there is a schism between symbolic and substantive efforts towards sustainability.

Secondly, green finance has to stay afloat in the troubled waters of differentiation into which climate change negotiations have navigated themselves over the years. The principle of Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC) bears relevance in this regard. The CBDR-RC was borne and formalized in 1992 by the UNFCCC treaty based on the nexus between industrialization and climate change. The reasoning behind its adoption was the acknowledgement that developed countries witnessed industrialisation long before the developing nations and that an industrialised state has a greater share in the contribution towards climate change. Hence, developed countries should bear the greater burden of tackling climate change and other environmental concerns. Ever since, it was propounded that CBDR-RC has been a guiding principle as well as a source of discord in the UN climate negotiations. In 2014, at the 20th Conference of the Parties (COP 20) to the UNFCCC agreed on a new phrase, common but differentiated responsibilities and respective capabilities, in light of different national circumstances, implicitly laying the foundation for the Paris Agreement on climate change. Most developing countries were keen that the principle of CBDR-RC should form the context for implementing the Paris Agreement while the Umbrella Group, consisting of twelve parties to the UNFCCC, and the EU had their reservations. In addition to the historical baggage, the Umbrella Group and the EU argued that since the meaning and implications are uncertain, and its introduction in the agreement would introduce uncertainty in the implementation. Unlike its predecessor, the Paris Agreement operationalizes the CBDR-RC principle by tailoring differentiation to each area, ie mitigation, adaptation, finance, technology, capacity-building and transparency. In effect this has resulted in different forms of differentiation in finance.

The aforesaid tussles, one between the realms of ‘finance’ and ‘climate change and sustainability’ and the other within the realm of ‘climate change and sustainability’, create practical challenges for the overall success of green finance. It remains a mere buzzword which gets further tainted with problems such as non-disclosure, green washing, asymmetry, etc. For instance, unlike Europe, in China, the most severe environmental problem is air pollution. Consequently, clean coal is treated as a green project in China whereas it is not in Europe. In 2018, Tesla was ranked highly in respect of ESG in the MSCI KLD rating system but ranked worst in the FTSE Russel ESG Rating. The reason is that the latter evaluates the carbon emissions of a firm’s factories rather than its products. The above two examples are only few among many of the on-ground result of the chaos in green finance—too many cooks spoil the broth! Thus, the definitional issues of green finance are foundational. Without a universal understanding, the work of scholars in the field of evaluating green finance become ineffective. Additionally, it is a futile exercise to reconcile the plethora of definitions on green finance unless disunities, within a discipline and between disciplines, find a common ground. Hence, any new efforts to define green in green finance and/or green finance should communicate this.

‘Without necessarily naming it “green”, some day in the future all finance will be green...’

Unenbat Jigjid (Mongolia Bankers Association)

Rashmi Patowary is a assistant professor of law at Jindal Global Law School, O.P. Jindal Global University, India.