Climate change has become a major topic in recent years. Many countries are beginning to experience the effects of carbon emissions. For context, carbon emissions are the primary cause of climate change.
There are wildfires in Australia and many waves of flooding in Asia. Also, some Asian countries are guilty of the largest carbon emissions in the world. Countries like India and China are constantly in the news for their growing carbon footprints. This trend has driven an increased focus on green finance.
What is Green Finance?
In its simplest form, green finance is an investment targeted at achieving a better environment. It includes funds directed at supporting environmental policies and reducing environmental damage. Such financing could be through green bonds, green funds, or green loans.
The trend of green finance has been on a steady increase. For example, governments issued over $269 billion worth of green bonds in 2020. Asia has joined the bandwagon of continents seeking to expand their green finance systems. China recently announced its intention to prioritize green finance over the next five years. This year, Singapore also announced that it would issue green bonds worth $26 billion for infrastructure projects.
How Blockchain Can Revolutionalize Green Finance in Asia
While green finance is an important financial innovation for achieving climate goals, it has its flaws. The costs are high, and there is little assurance that the finance is directed at climate impact. Blockchain could potentially solve these challenges in the following ways:
- More Traceability
There are immense opportunities for the development of green finance in Asia. The government is willing to explore it, and potential investors are on the ground. However, the primary challenge with green finance is that investors are often unable to verify that the green bonds are making any environmental impact. This issue has discouraged several investors since it is difficult to identify the bonds that are linked to sustainable projects.
Blockchain solves this problem by providing a distributed ledger technology that evaluates underlying projects of green bonds, tracks expenses, and monitors project proceeds. This way, blockchain would assure investors that environmental impact is being made with their financing.
- Less Cost
With blockchain, we can easily tokenize green bonds. Therefore, more individuals will be able to invest. Essentially, the bond issuers will swiftly gain access to a large pool of capital. Comparing the issuance cost between conventional green bonds and blockchain-backed green bonds, it is clear that blockchain is more cost-effective. The cost of issuing a conventional green bond is about $6.4 million, while it only takes $692,000 to issue a green bond on the blockchain.
As global talks on climate change increase, it will become necessary for national governments to devise innovative financial products. These products will have to cover huge renewable energy investments. The use of blockchain will largely simplify the process of using these products.