Climate Change and Finance

Table of Contents

1. Frontmatter

2. Green Finance and Investment Dynamics

   1. Frontmatter

   2. Green Finance Initiatives and Their Potential to Drive Sustainable Development

      Nouman Nasir, Waqas Ahmed

      Abstract

      This study examines the role of green finance initiatives in driving sustainable development. It provides an overview of green finance principles, exploring its evolving nature and global recognition. The chapter explores the relationship between green finance initiatives and sustainable development, showcasing their contribution to economic growth while minimizing environmental impacts. It discusses various financial instruments such as green bonds, green loans, and impact investing, and their role in supporting sustainable projects across sectors like renewable energy, sustainable infrastructure, and circular economy practices.

      Furthermore, this chapter addresses challenges and opportunities associated with implementing green finance initiatives, including limited awareness, regulatory constraints, and capacity building. It provides potential solutions and strategies to overcome these challenges through stakeholder collaboration, policy reforms, and innovative financial mechanisms. Case studies and best practices from different regions and countries illustrate successful green finance initiatives, highlighting their transformative power in integrating environmental considerations into financial decision-making processes.

      The chapter argues for the importance of aligning financial systems with environmental goals and emphasizes the potential of green finance initiatives to drive sustainable development. It advocates for mainstreaming green finance practices globally to create a more sustainable and resilient future. This chapter is a valuable resource for researchers, policymakers, financial professionals, and other stakeholders interested in advancing sustainable finance practices and achieving a greener and more sustainable world.

   3. Comparative Efficiency of Green Assets and Black Assets Around the Russo-Ukraine War

      Remzi Gök, Eray Gemici

      Abstract

      Our study examines the hedging ability and safe-haven properties of green/clean assets compared to two major safe-haven instruments around the war in Ukraine. The results show substantial variations in average multivariate portfolio weights and hedging effectiveness under different techniques and during Russo-Ukrainian war. Green bonds provide a negligible and negative contribution to volatility reduction despite their high portfolio weights. WTI and clean energy markets appear to be the most attractive investments with below-average portfolio weights and make significant contributions to reducing overall volatility. The increased uncertainty in financial markets driven by the war has negatively influenced the return performance of multivariate portfolios. During the war period, green bonds had the highest asset allocations for the bivariate portfolios, followed by gold, and significantly but slightly reduced portfolio risk. We find that hedging rates and effectiveness rise for the majority of assets during the war, implying that, with a few exceptions, hedging costs rise during the crisis and the cost of a hedge becomes cheap for green bonds and costly for gold. Green bonds exhibit the worst performance under all strategies in both periods, whereas green commodity index, followed by WTI, has the best reward-to-volatility ratio under the RPP model prior to the conflict period. Throughout the study period, both negative and positive scale and event-dependent co-movements between all financial asset return combinations emerge. The commencement of the conflict in February 2022, along with Ukraine’s counterattacks beginning in August 2023, has a significant influence on the direction of co-movements. Our findings shed light on the portfolio implications and risk management.

   4. Does Foreign Green Finance Inspire Environmental, Social, and Governance Sustainability Metrics? Evidence from MENA Countries

      Faris Alshubiri

      Abstract

      The chapter aims to investigate the relationship between foreign green finance and environmental, social, and governance sustainability in MENA countries over the period from 2011 to 2021. The chapter used diagnostic tests as tests for selecting appropriate estimators. The chapter used Feasible Generalized Least Squares (FGLS), instrumental variables (2SLS) regression, and instrumental variables (IV-GMM) regression for more robustness. The main conclusion shows that there is a significant negative relationship between foreign green finance and environmental, sustainability. Meanwhile, there is a significant positive relationship between foreign green finance and governance and social sustainability in the MENA countries. The main recommendations of this chapter are focused on the importance of formalized strategies and policies to improve transparency, accountability, capacity building, and community involvement in long-term planning to increase foreign green finance and promote positive environmental, social, and governance sustainability.

   5. Investor Attitudes and Preferences Toward Climate Change and Sustainable Investments: A Bibliometric Analysis

      Juan Infante, Carlos Estevez-Mendoza

      Abstract

      This chapter explores the evolving academic perspective on the nexus between climate change, finance, and responsible investment. Within the global academic landscape, there is an intensified emphasis on the intricate relationship between business practices and the urgent issue of climate change. Specifically, the finance domain is at the forefront, delving into the financial implications of environmentally conscious decisions and how they shape the modern investment arena. As the discourse progresses, studies have underscored the growing significance of climate-related risks for institutional investors, suggesting that contemporary financial strategies are increasingly attuned to climate considerations. There is also a marked rise in publications illustrating the link between climate concerns and investment behaviors, emphasizing the synthesis of ethical considerations with financial strategies. Echoing broader societal shifts, the academic sphere presents climate change as an immediate concern, necessitating a proactive response from the influential investment community. This chapter employs bibliometric techniques to examine the research literature evolution methodically. It identifies the most relevant authors, the theoretical framework they built to support their contributions, and the themes they developed around the topic. This way, we provide objective grounds for further studies and identify potential gaps that could be addressed.

   6. The Role of Financial Institutions in Addressing Climate Change

      Sunanda Vincent Jaiwant, Ajitha Haridasan, Joseph Varghese Kureethara

      Abstract

      Climate change is an impending danger that humanity has been facing for the past few decades. Recurring cyclones, floods, and severe droughts have become common across the globe and cause widespread destruction of resources, infrastructure, and human lives, resulting in large-scale displacement. Businesses and governments are becoming more aware of the significant effects that climate change will have on the finance sector. There are two primary ways that climate change impacts the finance industry. The first is a physical risk that results from harm to assets, facilities, and the environment. The second risk, known as the "transition risk," is brought on by modifications to public and economic sentiment, technological advances, and environmental legislation due to the transition to an economy with a lower carbon footprint. Exposures might differ greatly from one nation to another. Countries with low and average incomes are often more exposed to physical risk. Financial institutions contribute significantly through carbon pricing and other fiscal policies in decreasing emissions and raising funds. To partially offset the cost of natural catastrophes, financial institutions and markets offer financial security using insurance and other risk-sharing arrangements, such as catastrophe bonds. Financial institutions help activate funds for investing in climate mitigation activities and developing resiliency to climate change as responsible responses to financial warnings, such as carbon prices. Financial institutions have begun implementing various green banking measures to reduce the adverse effects. They are attempting to solve the difficulties that are imminent, particularly from the perspective of risk management, and have created environmental policies and launched a variety of green financial instruments. The study describes financial institutions' key role in mitigating climate change and contributing to climate action initiatives. It deliberates upon the improvement limitations and probable prospects of scaling up climate finance by the financial institutions.

   7. Green Development Prospects of Fossil Fuel Export-Dependent Countries: A Case Study of the Caspian Sea Region

      Liudmila Filipava

      Abstract

      Toward the Global Agenda for Sustainable Development (UN Agenda 2030), the fossil fuel export-dependent states are particularly interested in implementing their energy policies. Despite the necessity for structural transformations, the countries nevertheless pursue enhancing fossil fuel production according to their long-term strategies, reorienting the focus from the green agenda toward stabilizing national economies and achieving comprehensive solutions to geopolitical changes. In the current research, the author conducts an empirical study of 38 fossil fuel-exporting states, analyzing variables in four groups (Green Growth, Climate Change and Green Transition, Fossil Fuel Dependence, and Macroeconomic) to investigate whether fossil fuel export dependence determines the effectiveness of ongoing greening reforms. The author observes a negative correlation between the Global Green Index (GGI) and governmental revenues derived from fossil fuels, thereby substantiating the assertion that a green transition is feasible through diversifying revenue sources and reducing dependence on fossil fuel exports. Increasing the role of renewable energy and green hydrogen will allow the Caspian littoral states to develop export supplies to the EU through the Green Deal plan. Simultaneously, improving the national taxonomy and integrating it into the Global Green Finance (GGF) market will gradually transform the raw material export-oriented model into a resource-saving one, considering the national specificities and priorities of the Caspian Sea Region.

   8. Financial System Readiness to Achieve Carbon Neutrality

      Umair Saeed Bhutta, Ahmar Qasim Qazi

      Abstract

      This chapter examines the state of green finance in Oman and evaluates its capabilities to achieve environmental targets set by the country. This study analyzes the status of developing innovative green finance products, such as green Sukuk (green bonds) and other banking products in the Sultanate. Green finance is important to facilitate and encourage various stakeholders of society to promote financing for a sustainable future. The chapter also gauges the green financing initiatives initiated by different financial institutes of the country to promote the use of renewable resources in the Sultanate. The study uses the Content analysis methodology to ascertain the country's progress toward green finance. Several aspects of the data are identified and analyzed for content analysis. This analysis concludes that green finance is still in the emerging stage in the country. For commercial projects, green finance products have shown little progress. In the recent past, different financial institutes started green finance products for financing domestic projects. However, the scale of this activity is also lower than required to achieve the country's environmental goals. The study concludes that the government is trying to enhance green finance activities at various levels. Still, compared to other countries of the region, there is much to be done to achieve climate goals. The study recommends policymakers develop a mechanism to overcome challenges in promoting green finance. Also, it needs to support issuers in issuing advanced financial products like Green Bonds and Sukuk. It can be done by raising awareness about green finance, providing preference treatment for green financial products, and developing a clear regulatory framework.

3. Climate Change, Policy, and Economic Governance

   1. Frontmatter

   2. Emerging Trends in Climate Change and Global Economic Governance

      Achyutananda Mishra, Ananya Pandey, Joseph Varghese Kureethara

      Abstract

      Climate change is one of the most significant challenges of our time leading humanity towards a catastrophic future. Its adverse impacts undermine the ability of all countries to achieve sustainable development. Increases in global temperature, sea level rise, ocean acidification, and other climate change impacts seriously affect coastal areas and low-lying coastal countries, including many least-developed countries and small island developing states. The survival of many societies and the biological support systems of the planet is at risk.

      The global economic system and policy planning need to be fully prepared to face the challenges of climate change, although it can play a pivotal role in addressing it. Green finance has emerged as an effective alternative to address the challenges of global climate change. Green finance refers to using private and governmental funds for initiatives that protect the environment from harm and its associated effects, such as climate change and air pollution, produce a wide range of social advantages, and provide investors with adequate financial returns. In addition to tools for reducing greenhouse gas emissions and adapting to climate change, green finance has emerged as a strategy that includes financial services and products that address a more comprehensive range of environmental issues, such as industrial pollution control, waste management, sanitation, and hygiene, and ecological protection.

      This chapter explores the idea of green finance in the present scenario and its potential to achieve the goals of climate change mitigation and adaptation. Further, it will examine how green finance can be integrated into global economic governance. The study finds a deep correlation between global economic governance and the achievement of sustainability. Further, it is found that economic governance and policy planning are crucial in achieving a carbon-neutral state across the globe.

   3. Climate-Related Financial Regulations and their Impact on Geotechnical Engineering

      Ali Akbar Firoozi, Ali Asghar Firoozi

      Abstract

      This chapter explores the dynamic interplay between Climate-Related Financial Regulations and Geotechnical Engineering, focusing on the resultant impacts, challenges, and opportunities. In an era marked by escalating climate concerns, these regulations have increasingly begun to shape practices across various sectors, particularly in geotechnical engineering. This chapter aims to provide a thorough overview of this nexus, equipping engineering firms with the knowledge to navigate the evolving regulatory landscape adeptly. Initially, it offers a concise overview of climate-related financial regulations, highlighting their global relevance and implications. Subsequently, it examines these regulations’ direct and indirect impacts on geotechnical engineering, specifically focusing on their influence on risk management, project design, and financial decision-making. The discussion then pivots to strategic approaches for geotechnical firms, emphasizing how compliance with these regulations can drive innovation, enhance competitiveness, and bolster sustainability. The chapter concludes by underscoring the necessity of continuous stakeholder engagement, adopting adaptive business strategies, and a sustained commitment to sustainability. It advocates for proactive involvement from geotechnical engineering firms and other stakeholders in embracing these regulations, thereby fostering a culture of sustainability, innovation, and resilience.

   4. Linking Environmental Performance and Financial Profitability of Companies under Greenhouse Gas Emissions Trading

      Isabel Cristina Mañas-Álvarez, Federico Galán-Valdivieso, María del Carmen Caba-Pérez

      Abstract

      Given the current climate crisis, several international measures have been taken to combat air pollution, including the European greenhouse gas emissions trading scheme (EU-ETS). This tool is vital for those organizations forced to participate in the system (because of their sector of activity) since their production could be restrained by the emission limits, or their profitability could be reduced because of the acquisition of emission rights or investments in carbon-reducing policies or technologies. Through an OLS multiple linear regression, this paper analyzes the relationship between three measures of environmental performance and the financial performance of European companies, both belonging to the EuroStoxx600 index and participating in the EU-ETS, in the period 2018–2022. The results show a significant and negative relationship between the company's financial profitability and the level of CO₂ emissions, that is, low carbon emitters present higher levels of financial performance. This result implies that, although in the short term, it is possible that investing in carbon-reducing measures impacts firms’ profitability, in the long term, these obstacles are compensated by higher returns for EU-ETS participants.

4. Sector-Specific Impacts and Strategies

   1. Frontmatter

   2. The Impact of Carbon Emission and Energy Factors on Climate Change in BRICS Countries

      Vanitha S, N. Thangaiyarkarasi

      Abstract

      The main causes of climate change and global warming are human activities and are primarily due to burning or combustion. Due to the development and improvement of the Industrial Revolution, the burning of fossil fuels has increased carbon emissions. It is one of the main challenges of climate change and global warming in the economic world. The main objective of this study is to examine climate change and its impact on carbon emission and energy factors in BRICS countries for the period of 20 years from 2003 to 2022. The study tests the relationship between carbon emission, GDP, and energy factors with the tools used for applied econometric analysis of Granger causality between all variables. Variables of Energy Use, Electric Power Consumption, Access to Electricity, and Renewable Energy Consumption are considered energy factors. The empirical results show that increasing GDP reduces carbon emissions to a low-carbon economy in the long run. The traditional relationship between per capita CO₂ emissions and per capita GDP. Both indicators appear to have increased from 1990 to 2008, after which CO₂ emissions began to decline in line with the global economic crisis, while GDP per capita continued to rise (Jambor and Balogh, Determinants of CO2 emission: A global evidence, 2018). As a policy implication, developed countries agree to provide finance to developing countries should increase the technology and infrastructure for adaptation and a new renewable energy-based economy.

   3. A Nexus Between Climate Change Risk and Financial Performance of Agricultural Businesses in Developing Economy

      Muhammad Sheeraz, Nadeem Iqbal, Muhammad Sajid

      Abstract

      Considering the increasing systemic risks, it is crucial to analyze climate-related concerns' impact on agricultural firms' financial performance, especially in developing countries. The research sought to examine the possible influence of climate change risks on the financial viability of publicly listed agricultural companies in Vietnam. Previous research has mostly used statistical and benchmarking methods, focusing on retrospective questionnaire surveys and corporate environmental reports. The methods used resulted in linear, probabilistic, and static understandings of how climate change affects company operations and economic performance. Nevertheless, they fail to adequately capture the intricate long-term impacts of climate change on the financial performance of corporations. Our research aims to enhance the existing body of knowledge by constructing a dynamic model that investigates the changing connections among climate change threats, financial performance, and operational processes. The project aims to develop a comprehensive model that will improve the understanding of climate change and its impact on company performance for managers and academics. Our model is based on corporate climate change management, systems thinking, and system dynamics. It leverages Stella software as its fundamental framework. This comprehensive approach will provide useful insights into the complex relationship between climate change and the financial performance of agribusiness enterprises in Vietnam.

   4. Effects and Opportunities of Climate Change on a Company’s Goodwill

      Amir Ahmad Dar, Akshat Jain, Mehak Malhotra

      Abstract

      Goodwill refers to reputation. In business and accounting, it refers to the intangible asset representing the excess value of a company's tangible and identifiable assets over its liabilities. It is essentially the value of a company's reputation, brand, customer loyalty, and other intangible factors that contribute to its success and ability to generate earnings above the value of its net assets. There are various methods for estimating the value of the Goodwill of a firm. The methods are the super profit, annuity, capitalization, etc. The main parameters used to estimate the value of goodwill as per the above models are normal profit, super profit, interest rate, number of purchased years, etc., which are all factors that impact the value of the goodwill. But some other factors impact it. In this chapter, we will discuss the effects and opportunities of climate change on a company’s reputation. The effects of climate change on goodwill will vary depending on the industry and region, and the steps taken by the company to manage climate-related risks it is vital to emphasize. A real-world example of how climate change can affect a company's goodwill and reputation is the case of BP (British Petroleum) and the Deepwater Horizon oil spill in 2010 was explained in this study.

   5. Harnessing the Potential of Green Cryptocurrencies: A Path Toward Climate Change Mitigation

      Nicola Del Sarto, Elena Scali, Roberto Barontini

      Abstract

      The rise of cryptocurrencies has introduced a paradigm shift in global finance but has concurrently raised critical environmental concerns linked to energy-intensive cryptocurrency mining. This chapter explores the concept of “Green Cryptocurrencies” as a promising solution to alleviate the ecological consequences associated with cryptocurrency ecosystems. Beginning with analyzing cryptocurrency mining's environmental implications, including its health and climate impacts, we underscore the importance of transitioning from proof-of-work (PoW) to more sustainable consensus mechanisms. “Green Cryptocurrencies” encompass a range of initiatives and strategies designed to reduce carbon emissions within the cryptocurrency ecosystem. We provide a comprehensive literature review on cryptocurrency environmental impacts and the development of green alternatives. Our statistical analysis reveals the relationship between electricity costs and the adoption of green cryptocurrencies. Furthermore, we detail the methodology for selecting green cryptocurrencies as case studies and report their characteristics. In particular, we focus on 13 green cryptocurrencies. Notably, we highlight that the adoption of these green cryptocurrencies can contribute to CO₂ emission reduction.

   6. Irrigating Arid Lands: Sustainable Development Through Blue Sukuk

      Muhammad Omer Rafique, Muhammad Asif Qureshi, Abdul Muhaimin, Muzafar Hussain Shah

      Abstract

      Amidst the escalating global water shortage crisis, Islamic financial instruments offer a viable and sustainable solution by utilizing blue sukuk. Grounded in the Islamic principle of Iḥya al-Mawāt, which advocates for the revitalization of barren lands, blue sukuk provides a framework for financing water infrastructure projects in arid regions. The proposed approach entails the issuance of blue sukuk to fund water infrastructure development, specifically irrigation systems, in parched lands. This strategy aligns with the Islamic principle of Iḥya al-Mawāt, enabling barren lands to be cultivated and transformed into productive agricultural areas. The authors used a content analysis of the Islamic law related to Iḥya and merged it with the existing Sukuk models to formulate a new solution for an old problem. Implementing blue sukuk projects holds immense potential to alleviate the water scarcity crisis, promising enhanced crop yields, poverty reduction, improved food security, and employment opportunities. However, realizing these benefits hinges on addressing the challenges like no regulatory framework, long-term financing, and the readiness of governments associated with blue sukuk projects, which include substantial investment requirements and regulatory adaptations. Despite the hurdles, the potential benefits of blue sukuk outweigh the challenges, positioning them as a promising tool to combat the water shortage crisis. By harnessing Islamic financial principles, Blue Sukuk offers a sustainable and practical approach to addressing this global challenge.

   7. Green Finance Initiative: Accelerating Sustainable Development for a Green Future

      Sumi K V

      Abstract

      This chapter explores the pivotal role of Green Finance Initiatives (GFIs) in driving sustainable economic development. It delves into the multifaceted components of GFIs, including renewable energy investments, sustainable infrastructure projects, and socially responsible financial practices. The chapter highlights the significance of regulatory support, such as tax incentives and environmental, social, and governance (ESG) reporting, in fostering a conducive environment for green finance. It examines the evolving landscape of green bonds and financial instruments, emphasizing their impact on shaping environmentally conscious investment strategies. The chapter also discusses the importance of risk management through climate risk assessments and integrating GFIs into global cooperation frameworks. Furthermore, it explores the educational and capacity-building aspects of GFIs, underscoring their role in cultivating a knowledgeable and environmentally conscious financial sector. Through a comprehensive analysis, this chapter aims to provide insights into how GFIs catalyze sustainable economic development, contributing to a harmonious balance between financial prosperity and ecological responsibility.