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International Journal of Management
Climate Change and Sustainability:
The Role of Finance in Driving the Transition to a Greener Future
Dina Joseph
Ph.D Research Scholar, Department of Commerce
VELS University (VISTAS), Pallavaram, Chennai, Tamil Nadu, India
M. Vetrivel
Associate Professor, Department of Commerce
VELS University (VISTAS), Pallavaram, Chennai, Tamil Nadu, India Abstract
One of the most important issues confronting mankind in the twenty-first century is climate change.
These days, more people are aware of global warming and its negative effects on human existence.
Change is thus necessary for survival, and ongoing efforts should be undertaken to manage the environment in a sustainable way. The necessity for quick action has increased as the effects of global warming become more obvious. The role of finance in addressing climate change goes beyond mere funding; it serves as a catalyst for sustainable development, driving innovation, incentivizing low-carbon investments, and reshaping the global economy towards a more resilient and low-carbon future. This paper highlights the pivotal role of finance in addressing climate change and highlights the transformative potential it holds for a sustainable future.
Keywords: Climate Change, Finance, Sustainability, Green, Transition, Carbon Emission.
Introduction
Climate change and sustainability are among the most significant global concerns of our present world. Climate change’s physical effects are already being felt, and they will have far-reaching ramifications for individuals, societies, economies, and the bottom lines of businesses and investors.Despite the fact that increased fluctuation has always occurred, scientific research shows that severe weather events have become more often and intense, and that the repercussions of climate change might be potentially disastrous in the next years or decades.More and more sectors of the economy, including the financial sector, are realizing the need of coordinating efforts to address these issues. As the world struggles to deal with the complex effects of climate change, the role of finance has come to be recognized as a crucial component in creating sustainable solutions.
Using the lenses of finance, two distinct but interdependent risks are associated to climate change. The first consequences of climate change include increased average temperatures, rising sea levels, altered precipitation patterns, and stronger and more frequent storms. These effects of climate change could be seen in the real world.Facilities, supply chains, workers, existing and future customers, and the communities that companies rely on may all be seriously impacted by these threats. Ecologically sound production and consumption are on the rise as a result of climate change. As a result of this change, the value of assets in some industries may fluctuate drastically.
These threats are mostly a result of the policy choices taken in response to climatic conditions. They are called transition risks.
OPEN ACCESS Manuscript ID:
MGT-2023-11016275 Volume: 11
Issue: 1 Month: July Year: 2023 P-ISSN: 2321-4643 E-ISSN: 2581-9402 Received: 10.04.2023 Accepted: 20.05.2023 Published: 01.07.2023 Citation:
Joseph, Dina, and M. Vetrivel. “Climate Change and Sustainability:
The Role of Finance in Driving the Transition to a Greener Future.” Shanlax International Journal of Management, vol. 11, no. 1, 2023, pp. 51–53.
DOI:
https://doi.org/10.34293/
management.v11i1.6275
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
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International Journal of Management
To combat climate change, funding and prudent investments are required in order to reduce emissions and fortify ourselves against future repercussions.
According to studies and papers published before the COVID-19 epidemic, investments in climate action will significantly contribute to the development of a sustainable economy.According to World Bank figures from October 2019, the global community would need to spend roughly US$90 trillion in infrastructure between now and 2030. According to their findings, a green economic transition may lead to increased economic activity and the creation of new employment.
Role of Finance in Tackling Climate Change Climate change has become one of the emerging topics of debate. Human actions like as using fossil fuels for heat and energy, clearing forests, fertilizing crops, storing waste in landfills, keeping animals, and manufacturing certain types of industrial items are major contributors to this problem. This issue calls for a comprehensive and collaborative effort from various sectors. Even though government policies and technology advancements play critical roles in mitigating and adapting to climate change, finance also emerges as an important catalyst in accelerating the transition to a sustainable future. Here are some of the roles of finance in tackling climate change.
1. Mobilizing capital for climate action: Finance mobilizes funds for sustainable projects, acting as a driver for climate action. Investments in renewable energy, energy efficiency, sustainable infrastructure, and other environmentally friendly initiatives are crucial for climate change mitigation and adaptation. Financial institutions, such as banks, development finance institutions, and impact investors, play a crucial role in channelling funds into these areas. They channel funds into low-carbon and sustainable initiatives through responsible lending and investment strategies, hastening the shift to a greener economy.
2. Integration of Environmental, Social and Governance (ESG) factors: In recent years, there has been a substantial increase in the incorporation of Environmental, Social, and Governance (ESG) issues into investment
choices. ESG integration comprises reviewing a company’s sustainability performance and identifying any possibilities or hazards associated with climate change. Investors are starting to see the benefits of using ESG factors in their portfolios to reduce risks, boost long-term returns, and connect their investments with sustainable goals. The transition in investment behaviour encourages the development of green companies while discouraging backing for industries with high carbon footprints.
3. Developing Innovative climate financing mechanism: The creation of new financial instruments that aid in the mitigation and adaptation of climate change is a crucial task for the finance industry. For example, green bonds have gained popularity as a mechanism to raise money for green initiatives. These bonds allow investors to fund projects like the construction of sustainable infrastructure or the installation of renewable energy sources. Similar to this, additional financial tools like carbon credits and climate risk insurance help to encourage emission reductions and increase resilience for climate-related calamities. In order to finance initiatives to adapt to and mitigate climate change, especially in poor nations, climate funds have also been formed. Finance can promote the flow of funds toward sustainable projects and improve climate resilience by developing and promoting these mechanisms.
4. Risk Assessment and Disclosure: Financial stability and asset values are significantly at danger from climate change. By integrating climate factors into risk assessment models and investment strategies, finance plays a critical role in controlling these risks. The potential financial ramifications of climate change, both physical risks (like severe weather occurrences) and transition risks (such policy changes and technology developments), are being recognized by financial institutions more and more.
Investors and financial institutions are placing more demands on businesses for disclosure and transparency regarding climate change.
This knowledge allows investors to make more intelligent investment choices and helps in
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assessing the possible financial effects of climate change. Finance supports the overall resilience of the economy by encouraging businesses to adopt climate-resilient policies. Companies are being encouraged to disclose their climate-related risks through programs like the Task Force on Climate-related Financial Disclosures (TCFD), which also enables investors to understand the financial ramifications and take the necessary action.
5. Developing Regulation and Policy: In order to achieve sustainability, policy and regulation are shaped in large part by the financial sector.
Financial firms can influence and may work with legislators to promote favourable policies. They can promote sustainable activities by providing firms with advantageous financing conditions that implement environmentally responsible business methods. Further encouraging sustainable practices within the business, finance can have an impact on regulatory frameworks by including climate-related variables into risk management procedures and capital requirements.
6. Divestment from high carbon assets: Finance can help the world move toward a more environmentally friendly future by investing in sustainable alternatives instead of high- carbon assets. Campaigns for divestment urge investors to embrace low-carbon options instead of investments in fossil fuels. This sends a clear message to businesses and decision-makers about the need of a changeover to cleaner, more sustainable operations.
Conclusion
The role of finance in addressing climate change is multi-faceted, extending beyond the provision of financial resources. The financial industry can be a potent driver of climate action by unlocking climate funding, analysing and managing risks, encouraging green investment and innovation, guaranteeing openness and transparency, and changing capital flows towards sustainability. Collaboration between
governments, financial institutions, enterprises, and civil societies are essential to reap the benefits of finance in accelerating the transition to a low-carbon, climate-resilient future. Finance can work together to reduce the effects of climate change and create a more sustainable and affluent world for future generations by adopting sustainable finance concepts.
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Author Details
Dina Joseph, Ph.D Research Scholar, Department of Commerce, VELS University (VISTAS), Pallavaram, Chennai, Tamil Nadu, India. Email ID: [email protected]
M. Vetrivel, Associate Professor, Department of Commerce, VELS University (VISTAS), Pallavaram, Chennai, Tamil Nadu, India.