Green Financial Products & Services
Monday, December 28, 2009 , Posted by Team Niveshak at Monday, December 28, 2009
Vibhu Mishra
IIFT, Delhi
The field of finance has always been very dynamic and has evolved through the ages. Vagaries in world economy and the evolving global scenario has seen numerous innovations in financial engineering and hence, the genesis of new financial products. Bankers, insurers and asset managers are always receptive towards new products as that would provide impetus and growth to the market.
Why ‘Green’ needs to go Greener?
Green financial products were introduced into the financial industry so as to add value, build careers, boost talent pool across the globe and provide a platform for ethical and eco-friendly investment. Mature organizations realize that the environmental protection has direct relation with competitiveness and profitability. This drives financial institutions to see sustainable development as a long-term attractive business field, pushing them to develop "green" financial products, with the aim, besides cash in, of promotion of sustainable development.
Green Products & Services on Offer
Carbon Funds: A carbon fund purchases emission reduction credits like CERs (Certified Emission Reduction Credits) or ERUs (Emission Reduction Units). Thus, these funds are an attractive option for regulated private companies and also for traditional investors for cash returns. Through recent collaboration between multilateral development banks and private financial institutions, a variety of carbon funds have emerged to help finance GHG emission reduction projects.
Green Mortgages: Green Mortgages are special mortgages for new homes which comply with the benchmark green energy consumption standards. Usually, the interest rate for green mortgages is 1-2 % lower than the market rate. In Netherlands a person can also claim exemption from income tax if he has opted for green mortgage product.
Green Cards: A broad family of green products includes debit and credit cards linked to environmental activities. “Green” credit cards offered by most large credit card companies, typically offer NGO donations equal to approximately half a percentage point on every purchase, balance transfer or cash advance made by the card owner. Annual Percentage Rates (APR) for affinity cards normally range between 15-22%, and many of these include annual user fees. Over the past year, tying credit cards to an offset program has become increasingly popular among European financial institutions. As with other product offset schemes, this supplementary service can be implemented at little cost to the lender, while both tangible and non-tangible returns are potentially sizeable.
Securitization: A risk sharing arrangement for environmental projects. Financial institution represents a guarantor at the mezzanine level of risk, allowing client to transfer risk to bank. Eco-Securitization scheme will test the feasibility of financing “natural infrastructure” by linking sustainable management of resources with the funding capacity and requirements of asset-backed securitization. The long-term aim, under the Eco-Securitization, is to introduce a new debt instrument into the global financial mix that employs the full asset range of a sustainable forestry business as security, including carbon sequestration, biodiversity and water management credits.
Green Insurance: “Green” insurance falls under the latter and typically encompasses two product areas:
1) Those which allow an insurance premium differentiation on the basis of environmentally relevant characteristics; and
2) Insurance products specifically tailored for clean technologies and emissions reducing activities. Mileage-based insurance is offered to vehicle owners. Discount is offered for hybrid and fuel efficient vehicles. Bank can also choose to offset vehicle’s annual emissions. Green Building Replacement and upgrade coverage products. Product covers unique type of “green” risks related to the sustainable building industry.
Across the Globe:
| Product | Institutions | | | Markets | ||
| Home Mortgage | Dutch | Banks, | CFS, | HBOS, | | |
| | | | | | | |
| Home Equity Loan | Bank | of | Citigroup, | | ||
| | CFS, Vancity | | | | | |
| Credit Card | Robobank, Barclays, Bank of | Europe, | ||||
| | | | | | | |
| Securitization | IFS, DFID | | | | Global | |
| Bonds | BNP Paribas, Goldman Sachs | Global | ||||
There are some issues which impede the growth of Green financial products. Green products have still not been able to position themselves as an economically viable option as many lower cost products exist in the market. Unlike of what is happening today in Europe, where the market of "green" financial products & services is growing substantially, globally, even though the market appears to grow, it is in an early stage, with indefinite boundaries and without having gained unified characteristics, differentiating it from the traditional industries.
The development and penetration of "green" financial products is a dynamic procedure that renders the need for cooperation between all the parties involved. From a financial point of view, it requires encouragement of innovation and investment of resources (financial, human and technological) on their development, while from a business perspective, it requires adoption of instruments and methods (sustainability report, interrelation between environmental and financial efficiency etc) that will contribute to the rational assessment and evaluation of plans, projects and the company itself.
In this framework, the development of an innovative market partnership between financial organizations, consultancy firms and enterprises is proposed, since the interrelation between the parties involved (stakeholders), the co-operations developed and the fulfilment of specific market needs will promote the maturing of the market in the total.
