Green finance: growing sustainably is possible

What are the opportunities and challenges of applying green financing principles? The issue was addressed by the Assistant Professor of the Corvinus Institute of Finance during the university’s summer Research Week, a Corvinus event of the New National Excellence Programme (NNEP) in mid-June. She said that there is no agreed definition of green financial products, but it is possible to define what they are. According to Dr. Németh-Durkó, green bonds differ from other debt instruments in the purpose for which they are used: the amount invested can only be used to finance new or existing projects with a sustainable goal. Another requirement is compliance with the principles of green bonds, which includes the following aspects: use of proceeds, the process of evaluation and selection of projects, and the management of proceeds and reporting, the latter ensuring transparency. She noted that if you look into the literature, you will find that a green bond is actually a bond where the amount of money invested can be used to finance environmental and climate change projects. 

She pointed out that when we talk about sustainability, we should not only think about sustainability in environmental terms. Indeed, the so-called ESG (Environmental, Social, Governance) aspects include both corporate and social factors. This includes corporate governance techniques, community management, or even the consideration of human rights, equal opportunities and inclusiveness issues, but also investing in human capital in the company.   

Previous studies have even shown that sustainability and growth often “cancel each other out”, meaning that it is difficult to imagine growth in an economy while preserving environmental values, but this also poses challenges at the company level. However, we now know that it is achievable: it is possible to invest in assets that are both profitable and sustainable. 

What are the benefits of green bonds? 

According to Dr. Németh-Durkó, the macroeconomic effects of green bonds include encouraging investors to support green activities, accelerating sectoral change and improving the quality of the environment. From a micro perspective, it can have a positive impact on the financial performance of companies, accelerate investment and, by increasing environmental commitment, it can give a positive image of the issuing company. It also has a positive impact on corporate behaviour, and it can improve the share of green technology and the company can use the proceeds from the bond issue to increase green innovation, the speaker added. 

According to Dr. Németh-Durkó, the ratings given to financial products by rating agencies vary widely, although they use mostly the same indicators. According to the researcher, this situation therefore understandably opens the door to greenwashing, where a company presents itself greener than it really is. In her view, this does not necessarily indicate an intent to deceive, because the regulation can be misunderstood and definitional uncertainty is a problem with so many laws and directives.  

Significant macroeconomic impact: up to 60 percent more patents 

Dr. Németh-Durkó also said that green financing is already very advanced, with huge amounts of money flowing into the economies through development and modernisation, using renewable energies such as solar panels. In her view, if these green funds are used in the right place and at the right time, they should have a pronounced macroeconomic impact. And this effect can be measured by the increase in the number of patents, she added. In her research, she found that the positive effects for companies add up and that the increase in innovation potential can be reflected in the number of green patents. Issuing corporate green bonds can increase the number of green patent applications in a country by up to 60 percent. 

Dr. Németh-Durkó used a model to show that in 14 European countries that have entered the green bond market, the number of patents has increased. The researcher analysed data from Belgium, France, Ireland, Spain, Germany, Poland, the Netherlands, the Czech Republic, Greece, Portugal, Slovakia, Denmark, Estonia and Hungary. She added that it is difficult to obtain adequate and comparable data from the different countries, as the databases are very heterogeneous, and she is currently working on this problem. Despite the difficulties of measurement, the best available and meaningful data for determining innovation potential is the change in the number of patents. She stressed, however, that she has found a correlation between the surge in green bonds and the increase in the innovation potential of an economy. 

T. K.