Financial products and services claiming to be "green" are proliferating, but are they really green? Distinguishing those financial products that have a real, measurable, and positive environmental impact from those that don’t is hard. Investing in green doesn’t mean you’re green. Ben Caldecott, Founding Director of the Oxford Sustainable Finance Programme, argues that for a financial product or service to be green, two conditions must hold.
The first condition is simple. The activity the financial product or service is encouraging should be green (and the activity it discourages should be brown).
The second condition is more complex and involves a five-point framework. The activity must make a clear and measurable difference in at least one of five ways: i) reduce or increase the cost of capital for green or brown products ii) reduce or increase liquidity for green or brown products iii) provide or enable risk management of environmentally related physical and transition risks iv) encourage or enable company adoption of sustainable practices v) support systemic change through spillover effects.
This framework can act as a checklist to assess the "greenness" claims of financial products or services. To take an example, green bonds can reduce cost of capital, increase liquidity, and enable risk management, but their contribution to the adoption of sustainable practices within a company or evidence of spillover effects is questionable.
Alternatively, a service like sustainability improvement loans may ease cost of capital and risk management issues (and potentially also the adoption of sustainable business practices), but they are unlikely to affect liquidity or provoke spillover effects.
To take a final example, products like sustainable listed equity funds, such as the FTSE 100, may enable better risk management and the adoption of sustainable practices (if the company has an effective engagement strategy) but are unlikely to affect the cost of capital or liquidity.
Amidst growing claims of "greenness," this framework, which seeks to differentiate the greenwashers from the "real" greens, could prove a useful tool.