CHAPTER 2

GREEN FINANCE: TRENDS

AND FINANCIAL REGULATION
PROSPECTS
O. V. Andreeva, N. G. Vovchenko, O. B. Ivanova
and E. D. Kostoglodova

ABSTRACT

This chapter stands for justification of growing demand for supporting new
theoretical and methodological approaches in development of an actual green
economy’s financial framework taking into consideration modern growing risks
in the ecological, economic, social, and geopolitical environments. A notable
increase in environmental expenditures of both national economies and inter-
national financial institutions is determined by the global state of the economy.
The climate change has been caused by escalating the energy supply struggle,
the nature exhaustion, and the need for providing balance to the market stating
green economy regulators. The main aim of this chapter is to study the trends
and the key state green finance regulation points. The research goal could be
achieved through highlighting the nature of green finance and its framework;
studying the concept of green finance and innovative financial tools’ devel-
opment, providing green economy’s development; and spotting trends and
imperatives of regional regulation of green finance. This chapter highlights the
necessity for implementing complex systemic and methodologic approaches in
making the green finance framework, summarizing leading practices in green
funding and green economy’s funds raising, considering limits in green finance
tools’ utilization in current conditions, strengthening the power of both federal
and regional authorities in solving financial problems of energy saving, and
extending the practices of companies and institutions’ green financial tools’

Contemporary Issues in Business and Financial Management in Eastern Europe

Contemporary Studies in Economic and Financial Analysis, Volume 100, 9–17
Copyright © 2018 by Emerald Publishing Limited
All rights of reproduction in any form reserved
ISSN: 1569-3759/doi:10.1108/S1569-375920180000100003
9
10 O. V. ANDREEVA ET AL.

utilization. The necessity for a green sustainable development across the globe
has driven this research to use different types of instruments to point out the
benefits of such a development. In addition, green finance state regulation tools
have been proposed.
Keywords: Green growth; green finance; green funding; green finance state
regulation tools; state policy; sustainable development
JEL classification: H11; H40; H50

INTRODUCTION
Green finance as a subsystem of global financial framework is an initial issue
of finance. Theoretically, there is no certain “green finance” definition both in
Russian and international literatures. Though, some consider green finance both
broadly and strictly (Porfiryev, 2016).
Strict theoretical justification of the term “green finance” is based on its inclu-
sion into the financial mix related to reducing ecological and climatic develop-
ment risks, ecosystem services and environmental technologies, equipment
production, and proper waste management. In addition, broad “green finance”
treatment includes ways of technological projects, processes, and ecological initi-
atives’ funding, financial encouragement of alternative energy initiatives in energy
saving, and renewable energy domain.
To form the “green finance” paradigm in Russia, the Ecological Doctrine was
approved in 2002 (from August 31, 2002, p. 1225) to increase the ecological secu-
rity and define the ecological policy, highlighting the core goal of preserving the
nature and supporting its integrity for sustainable development reasons.
The ecological policy includes introduction of energy-saving and waste-free
technologies in all activity areas; technological re-equipment coupled with removal
of outdated equipment entities from operation; ecological equipment introduc-
tion, providing high quality of water, soil, and air according to the standards;
water economy in industry and public infrastructure; supporting environmentally
effective energy production including renewable and recycled sources utilization;
development of recyclable materials utilization; decreasing energy and materials’
losses in transit through ecologically friendly decentralization of energy produc-
tion and energy-consumption optimization; development and improvement of
ecologically friendly transport, transportation lines, and fuel including non-carbon
types; conversion to the ecologically friendly mass transport; and improvement of
environmental public infrastructure reconstruction and building technologies.
Adopting concerted measures in current state policy economic frameworks’ con-
version includes structural shifts (reduction of the resource-utilizing entities’ share
in the national economy and development of environmentally friendly manufac-
turing) to become the key objective of ecological policy in the regions for decades.
At the same time, the “Basic Principles of State Policy of the Russian Federation
in the ecological development area through to 2030” were adopted, highlighting
Green Finance 11

the following milestones: providing the environment-oriented economic growth,

environment protection, realizing the environmental human rights, strengthening
the environment protection law, and providing the ecological safety.
The key objective of the regulatory acts is switching from the extensive export
and resource model of economic development to the ecologically balanced mod-
ernization one. The number of state policy measures is intended to reduce the
negative impact of production and consumption waste.

THEORETICAL, INFORMATIONAL, EMPIRICAL, AND

METHODOLOGICAL GROUNDS OF THE STUDY
Core green economy financial regulation tools in environmental area include
the following: green funding, resource payments, subsidization, lending and
credit, carbon tax, green bonds, ecological insurance, green state procurements,
green taxation, and target green projects’ funding. Green funding is one of the
world-known financial tools (Fig. 2.1).
Green environmental finance field lies in infrastructure funding, green technolo-
gies’ state financial support, and green markets’ development. Green finance forms
the basis for green economic development and could be connected consistently
with it (Rubtsov, 2016; Medvedeva et al., 2017; Thalassinos and Dafnos, 2015).
Institutions are banks and funds. Herewith, banks have the competitive
gain due to major autonomy and operational efficiency in providing invest-
ment products and services. In Russia, companies that implement energy-saving
technologies could receive the financial support via development institutions
(Vnesheconombank, and Industrial Development Fund) on a competitive basis.
The need for financial institutions, focused on reallocation of green technologies’
investments, is driven by the world’s best practices for green innovations’ funding.
Financial institutions could support green economy development by follow-
ing responsible funding or targeted economic projects’ investing principles. Green
growth needs higher investments’ growth rates and higher innovations’ transfor-
mation speed. The Green Finance Initiative was adopted in London in 2016; it
aimed at solving problems of sustainable development and implementing the
Paris climate accord; thus, highlighting London as world financial center in the
green finance field.
Financial regulation of green economy predetermines the need for resource
efficiency state support and regulation in the following contexts: (1) financial sup-
port of energy saving and renewables’ infrastructure objects, (2) natural capital
and water resource utilization, (3) technological modernization aimed at water
pollution reduction, and (4) providing environmental sustainability and green
growth (Albekov et al., 2017; Shekhovtsov et al., 2017; Anureev, 2017).

RESULTS
Summarizing the world practices of green finance highlights features and trends of
green funding, raising the green economy’s capital. First, investments in economy
12 O. V. ANDREEVA ET AL.

Fig. 2.1. Integrated System Methodological Approach to Green Finance

Framework Formation

projects should provide a number of economic advantages. Herein, it is necessary

to consider the high cost of green investment projects compared to traditional
ones, and the need raising state regulation financial tools like procurements, tax
concessions, and subsidization of projects’ expenditures, targeted credit, grants,
and state funds.
Second, green investments were effectively used as an anti-crisis policy tool
during the 2008–2009 crisis, when many states paid more attention to invest-
ing in projects of high-tech environmental manufacturing, infrastructure
Green Finance 13

(Renewable Energy Sources (RES) and high-speed highways), and funding of

green jobs (social activities organization including waste management).
Third, green investments assume transition to low carbon economy, resulting
in decrease of carbon dependency that reduces greenhouse gas emissions as well
as allows adapting to actual climate shifts. In that context, important significance
is provided for administrative support of financial institutions’ activity that spe-
cializes in green investments. Moreover, applying of such an innovative tool like
emission and carbon taxes is justified by the current global situation.
Green tax is a key element of state regulation as well. First, it includes tax
incentives for green products and services’ production, applying taxes and fees
for negative environment impact minimization (greenhouse gas tax, non-effec-
tive energy fee, property tax, and transport tax). Different countries apply num-
ber of taxes: the United Kingdom applies climate and energy consumption fee,
Organization for Economic Cooperation and Development (OECD) countries
apply carbon tax, and China applies environmental tax.
Fourth, green bonds, that is, asset-backed securities, are turned to be an advanced
tool for debt finance. The basic number of green bonds issued is related to inter-
national development banks (European Investment Bank, World Bank, European
Bank of Reconstruction and Development (EBRD), and International Finance
Corporation (IFC)) as well as major corporations and state and municipal entities.
Fifth, the features of green investments include high risk based on innovation-
directed nature of environmental measures funding. Normally, a question arises:
what is the correlation of economic growth and economic risks that systemati-
cally appears at major infrastructure and industrial projects’ implementation. All
these need development of certain green finance risks’ evaluation system based
on modern risk management framework to reveal the connection between green
economy development objectives and trends. Integration of risk control and sus-
tainable economic development framework provides the unity of risk manage-
ment tools and methods in all green economy areas (Thalassinos et al., 2015).
An example of green investments’ risk reduction and hedging would be the
practice of clean water, air, climax ecosystem accessibility securitization, and
transforming natural assets into financial ones. However, now there are several
restrictions in applying green financial tools such as:

• sustainable development of green bonds’ market is interfered with lack of

institutional arrangement of issue standards;
• lack of specific regulation and centralized database of investment projects,
investors, and issuers;
• lack of certain green bonds’ fair value evaluation framework;
• half-provided environment for green investments’ development public-private
partnership;
• incomplete institutionalization of basic green strategies aimed at improving
long-term well-being and reducing inequality that mitigates major environ-
mental risks for future generations; and
• finally, high initial and transaction costs, extended return, and significant
financial risks.
14 O. V. ANDREEVA ET AL.

An overriding state policy objective is locked in energy capacity reduction of

both Russia and its regions (industries, companies, and entities as well). The Paris
climate accord highlights the need for increase in regions’ energy saving activ-
ity. Being specific in socioeconomic development, climate, economic structure,
each region needs a certain region-specified strategy for energy saving and green
finance to be developed, which includes the following:

• actual management methods practice (project-based approach, result-oriented

management, and risk management);
• green technologies and energy saving projects’ introduction;
• evaluation and indicator-based energy saving framework; and
• informational support, transparency of strategies, and their reports (Zhigalov,
2017).

Based on energy saving and performance polices, green technologies should

provide the balanced and sustainable regions’ development, social stability, and
shift in living standards via reducing health risks, saving non-renewable resources,
and recovering renewable ones, supported by green financial support.
Russia as an industrially developed country has its own ecological, economi-
cal, and social features with areas of environmental concern due to ignored eco-
logical factors at industrial planning before. To that end, strategic planning, along
with taking effective investments and adopting eco-technologies to provide syn-
ergy between economic growth, social well-being, and environment protection,
becomes more and more a topical issue.
The concept for the long-term socioeconomic development of the Russian
Federation until 2020 highlighted the following key objectives of environmental
policy:

• major environment and life quality improvement, building up the balanced,

environmentally oriented economy model and competitive industries;
• introduction of environmental and energy saving technologies;
• encouragement of production modernization and energy saving technologies’
introduction into daily use; and
• environmental entrepreneurship through efficient ecological sector of economy.

Thus, gradual transition to the green growth concept in Russia would be com-
pleted through the system of legal and institutional measures providing energy
performance and renewable resources’ development as well as waste reduction
and proper recycling encouragement.
However, hoping for the best output of green growth in Russia is a quite a deli-
cate issue. Long-term sustainable development depends on resolving issues like
supporting environmental industries with proper resources together with reduc-
ing the negative environmental impact and ecological management.
The need for priority development for green economy transition, specific
R&D envelopes including environmentally friendly energy industries, brand new
agricultural technologies, and green industrial technologies should be fulfilled
urgently within the ecological framework of Russia and its regions.
Green Finance 15

It is noticeable that recently some regions of Russia actively implement energy

saving technologies’ projects. Entities and private entrepreneurs could be sup-
ported by a special budget subsidizing mechanism, tax incentives, and partial
credit refunds. The output of these projects is summarized in regions’ energy per-
formance ranking of the Ministry of Energy to become a relevant state policy
tool in reducing the energy capacitance of the Russian economy. The ranking is
based on the following 7 indicators:

1. regional product energy capacitance reduction

2. energy performance of budget sector buildings
3. energy performance of outdoor lighting
4. energy performance of budget sector lighting
5. energy performance of budget sector heat supply
6. CHPP heat supply output, including the environmental indicators in state
programs
7. energy performance of construction and capital repair, promotion of
environmental lifestyle, and introduction of energy manifest framework.

We note that Khanty–Mansi Autonomous Area achieved 58 of 85 points.

Chukot Autonomous Area reached only 0.1 of 85, which indicates major dispar-
ity in Russian regions’ change-over to environmental economy. We point out that
the technique assumes indicators adjustment by the Ministry of Finance to con-
sider the level of regions’ fiscal capacity (three groups are highlighted).
Increase in energy performance and other green growth priority programs’
implementation is out of the question without proper budget funding. The energy
performance ranking clarifies that increasing in environmental expenses for 1.5%
of GDP by 2030 will cause the triple decrease in negative impact indicators as
well as improve the energy performance ratios.
However, according to Rosstat data, the indicator tends to decrease with 1.3%
of GDP in 2003 to 0.7% of GDP in 2011–2015 (Fig. 2.2).

Fig. 2.2. Environmental Costs in Russia, Historical Prices

16 O. V. ANDREEVA ET AL.

It is important to provide the adequacy of objectives. Just introducing the effi-

cient environmental technologies leads to reduction of risks and issues including
drain of resources, manmade load, and environmental pollution as well.

CONCLUSIONS AND RECOMMENDATIONS

Modern trends of globalization urge developed countries to form the green
economy model that could be expressed as not only developing green indus-
tries, but also creating the economy that supports decreasing of anthropogenic
impact on the environment due to massive modernization based on energy-
efficient and environmentally safe technologies. Environmental programs and
protection strategies are not systemic. Most of the objectives and principles of
ecological development are conditional ones. As a result, the socio-ecologic con-
dition changes insignificantly.
Now, the government is in the development of green financial tools’ applica-
tion by new Russian development institutions. Comfortable conditions should
be provided for financial sector’s activity, starting from major state banks. When
accepting the entities’ funding, it is important to include ecological components.
The National Ecological Foundation as well as Green Bank should be able to
manage and accumulate ecological projects with the zero rate of income tax.
The lack of proper legal and, therefore, financial initiatives is the key obstacle
in the development of more dynamical green financial tools. Due to this, it is
important to break new ground in application of green financial tools by Russian
development institutions and public companies in the context of ecologically sus-
tainable development encouragement and adjustment of new funding forms to
the features of the Russian financial market (Voronova, 2017).
To increase the environment protection from anthropogenic impact and pro-
vide safety of regions, we should solve the following issues:

• reduction of anthropogenic load coupled with saving of ecosystems;

• meeting the sustainable regions’ demands in natural resources and geological
data on subsoils;
• conservation and restoration of water bodies to the condition suitable for
favorable living environment;
• increasing the efficiency of utilization, protection, and regeneration of forests
in addition to saving the forests’ ecological potential;
• creating the comprehensive municipal solid waste and recyclables’ manage-
ment framework;
• long-term regional sustainable development strategies that include socio-eco-
logical–economical components and based on comprehensive land develop-
ment approach and cluster-based region policy (Nikonorov, 2017); and
• development of ecological education including theoretical and practical fun-
damentals of green economy, increasing the green literacy and education via
diffusion of corporate social responsibility values and ecologically oriented
mindset formation.
Green Finance 17

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