This article is brought to you by the Luxembourg–GLF Finance for Nature Platform.
Sustainable finance received a welcome boost from innovation in 2023 as the sector rapidly transforms from a niche area to a mainstream feature of investors’ portfolios.
With an estimated market value of USD 4.2 trillion in 2022, sustainable finance is a broad term that is often used interchangeably with both climate finance and green finance.
Yet, while all three overlap in scope, it’s important to differentiate between them.
According to the European Parliament, climate finance provides funds for addressing climate change adaptation and mitigation. Green finance has a broader scope as it also covers other environmental goals, such as biodiversity protection and restoration, and sustainable finance extends to environmental, social and governance (ESG) factors.
This means sustainable finance covers many aspects ranging from climate, renewable energy use and biodiversity protection to inequality and diversity, to executive remuneration and anti-corruption.
So, what strides did the sector make in 2023? Here are our top five sustainable finance innovations that emerged this year:
Developed by the non-governmental organization ADA and Luxembourg Aid & Development, the Financing Innovation Tool (FIT) works with small, innovative businesses in developing countries to access capital and improve their business skills to achieve social impact.
FIT offers a range of financial instruments – including debt, equity and guarantees – to enable these businesses to become financially autonomous and investor-ready so they can access further funding from professional impact investors.
The tool is Luxembourg’s first ‘societal impact company’ dedicated to financial services, and it enjoys a special legal status providing transparency and a secure, government-backed channel for donors.
Combining flexible financing solutions with ADA’s technical assistance, FIT will re-invest all profits, thereby maximizing the effectiveness of donations. With initial funding of EUR 5.5 million provided by ADA and the government of Luxembourg, the tool aims to raise EUR 10 million by 2025.
The Luxembourg Sustainable Finance Initiative (LSFI) Take Action Toolkit offers a range of different sustainability-related instruments to asset managers, asset owners, financial institutions and other financial actors.
Some of these online instruments provide collaborative support and guidance to help organizations integrate ESG criteria into their operations and investment processes. Others help measure and report impact using science-based data.
The instruments enable users to:
Each instrument has its own purpose and objectives, targeting a specific area of an organization or a stage of an investment decision process. The instruments are complementary and can be used simultaneously.
In June, BBVA Colombia and the International Finance Corporation (IFC) announced the launch of Colombia’s first blue bond – a debt instrument designed to finance marine and ocean-based projects with environmental, economic, and climate benefits.
The first tranche of USD 50 million will be used to support initiatives working to protect the country’s water resources. The aim is to finance projects constructing water and sewage treatment plants, ocean preservation and the protection of lakes, moorlands, and mangroves, according to BBVA.
Colombia is the second-most-biodiverse country in the world, with millions of hectares of ecosystems that require conservation and generate jobs for agriculture, tourism and increased productivity, the bank says.
Also this year, the International Capital Market Association (ICMA) released a global practitioner’s guide for bonds to finance the sustainable blue economy.
The World Bank has issued an innovative USD 50 million emission-linked bond to provide clean drinking water to about 2 million schoolchildren in Vietnam.
The bond will finance the production of 300,000 water purifiers and their distribution to 8,000 schools and other organizations around the country.
By avoiding the burning of fossil fuels in the water purification process, the project could prevent almost 6 million tons of carbon emissions, according to the World Bank.
Investors will earn a return linked to the issuance of carbon credits by a water purifier project implemented by a private Vietnamese company.
Each year in Vietnam, 9,000 people die from lack of access to clean water, and an additional 250,000 people are hospitalized, according to UNICEF.
The government of India joined the ranks of sustainable finance innovators by issuing its first green bonds to raise funds for the financing of green infrastructure projects.
The equivalent of USD 2 billion was raised in two auctions of five- and 10-year bonds in the first two months of the year.
The bonds are expected to fund solar power projects, followed by wind and small hydro projects. The Indian government has ruled out using them to fund hydropower plants larger than 25 MW, nuclear projects, or any power generation using biomass originating in protected areas.
Through these green bonds, India is creating a new channel for high-value investments to achieve its climate targets, which are to reduce emissions intensity by 45 percent this decade and increase the share of non-fossil power capacity to 50 percent by 2030.
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