FinanceWhat is environmental finance and why it is important?

What is environmental finance and why it is important?

Environmental finance is the financing needed to protect the environment, conserve biodiversity, and improve the environment. As a part of environmental economics, the international donor community has considered it a priority. One should not think of it as a donor-supported activity or separate project but as a part of national and global financing.

Environmental accounting deals with the measurement of the performance of the environment. It studies both financial and non-financial data.

Environmental accounting systems provide information about an organization’s environmental impacts. It has four approaches:

  1. Financial risk reporting.
  2. Social accountability reporting.
  3. Energy and materials accounting.
  4. Environment-related management accounting.

International environmental funds

There are various forms of environmental funds available in the world, and there are numerous international funding agencies that provide funds for various sustainable environment-related activities. The United Nations Development Programme (UNDP) sponsors programmes and projects that the Global Environmental Facility (GEF) finances. The Environment and Thematic Trust Fund (EE TTF) provides financial assistance to modern initiatives. International funding agencies for environmental projects include the World Bank, UN Environment Programme, International Finance Corporation, UNIDO, UN Food and Agricultural Organization, World Bank Clean Technology Fund (CTF), World Bank Strategic Climate Fund, and Kyoto Protocol Adaptation Fund.

Climate change financing

Climate change is caused by changes in climatic conditions that last for an extended period of time. Several mechanisms are being tried all over the globe to alleviate climate change. The Kyoto Protocol is an international treaty in which 37 industrialised countries participated and committed to reduce greenhouse gas emissions. It has implemented three market-based mechanisms:

  1. emission trading
  2. clean development mechanisms
  3. joint implementation.

Currently, the Kyoto Protocol is under review, and one can expect that more countries with new mechanisms will participate shortly.

Socially responsible investment

Socially responsible investment involves avoiding investments in firms that produce alcohol, tobacco, etc. and helping firms produce eco-friendly products.

Green banking is a type of banking that incorporates environmental and ecological aspects into its lending practices. It inspires industries to invest in environmental management to decrease their harmful impact on the environment.

Taxing tools for environmental financing

An individual can raise environmental finance by levying a tax on environmentally polluting substances. One can impose an environmental tax on any industrial activity to control the emission of greenhouse gases. Energy tax, insurance premium tax, solid waste tax, toxic waste tax, and corporate environmental income tax are some types of environmental taxes. Recently, the government has imposed an environmental tax on coal to promote clean technologies. Governments and individuals can raise the funds needed for environmental protection by imposing fees on water and sewer, recycling and disposal processes, fertilisers and pesticides, leather, industrial products, etc.

Environment-financing sectors

One needs environmental financing to protect and improve the environment and water bodies. Control solid waste pollution, air pollution, and industrial waste pollution. Treat sewage and health-related expenditures due to environmental degradation. Set up pollution treatment plants and install pollution control devices. The major sectors include transportation, housing, industry, institutional, municipal, and commercial, where the production of regular waste takes place due to daily activities. If one does not handle these wastes properly, environmental degradation will occur.

The polluter pays principle applies

Polluter pays principle (PPP) is an environmental policy that requires polluters to pay for their actions that pollute the environment. This policy determines multiple techniques by which the government can deal with pollution prevention and control. It is also called “extended polluter responsibility.” The motto of this principle is to transfer the responsibility of waste management from governments to the individuals that cause pollution. The scope of PPP has evolved, and it even prevents accidental pollution.

The importance of financial sustainability in business

Sustainable finance consists of making investment decisions that take into account not only financial returns but also environmental, social, and governance factors. It is a broad term that is often used interchangeably with “green finance,” depending on the context.

According to the European Union, sustainable finance is a type of finance that an individual uses to support economic growth while reducing pressures on the environment and considering social and corporate governance aspects. It gave many examples of environmental considerations, which include climate mitigation and adaptation, conservation of biodiversity, and the circular economy.

According to the United Nations Framework Convention on Climate Change (UNFCCC), climate finance is a subsection of sustainable finance that supports the mitigation and adaptation actions that will address climate change.

One of the most significant ways to fight climate change is to restore our planet’s landscapes. Forests and agriculture account for 30 percent of the solution to climate change, but they get less than 3 percent of climate financing.

As global warming is increasing day by day, the responsibility is on policymakers and financiers to meet the challenge.

Environmental Finance Degree

Environmental finance is useful across various sectors, which include corporate government agencies, individual households, and non-profit organizations. The rise in complete environmental management systems demonstrates the merging of environmental and financial practices. Individuals have presented carbon trading through accords.

Public sector agencies around the globe rely on environmental finance. Many European countries have environmental financing centres or funding centers. Many colleges and universities have these centres too. Some of them offer environmental financing degrees that emphasise economic and policy analysis, science and technology, finance, markets, and regulations.

Specialization in environmental finance helps students apply their superior technical skills to examine, decode, and evaluate financial information and market conditions. It helps them conduct independent research and exercise professional judgement in solving complex environmental finance problems. They feel confident while explaining recent developments and problems in banking, environmental finance, and professional practice. They show awareness of ethical, social, economic, regulatory, sustainability, and global perspectives that are relevant to the financial sector.


Environmental finance is essential to conserve and make sustainable use of resources, especially forest, soil, water, energy resources, land resources, etc. It comprises the facets of corporate finance, risk management, investment analysis, climate mitigation, pollution costs, renewable energy, and energy efficiency.

Siddharth Dey
Siddharth Dey
I am a content writer. I have honed my writing skills by pursuing a Bachelor of Arts degree in English (Hons) from the University of Calcutta. I create authentic and purposeful content.

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