Greening the Financial Sector: How to Mainstream Environmental Finance in Developing Countries by Köhn, Doris

CHAPTER 1 
Mainstreaming Environmental Finance into 
Financial Markets – Relevance, Potential and 
Obstacles 
Peter Lindlein
Abstract 
Mainstreaming environmental finance widens the utilisation of existing instru-
ments and extends them to environmentally beneficial activities. The objective is 
to serve clients in ways that make environmental finance a normal set of retail 
products. The sheer number of households and MSMEs (micro, small and medium 
enterprises) give providers the weight and opportunity to address environmental 
concerns. Financial institutions have a key role in environmental finance in ways 
that ensure sustainable development (Millennium Development Goal 7). 
Households, MSMEs and municipalities have an enormous range of technically 
viable environmental investments. But the actual demand is still much below the 
potential. This is because the material and/or financial benefits of environmental 
activities have been limited. ‘Greenbacks’ have been more important than ‘green 
thought’. However, this market is growing along with higher energy prices, and 
will grow further if the emphasis on subsidy is shifted from fossil energy to sus
tainable energy. 
The current demand for environmental investment is limited. But many poten-
tial investments are on the frontier of viability. To increase their viability, they 
usually require longer maturities and a high sensitivity to the structure and the 
conditions of capital cost financing. 
The trend of green financial products has not yet penetrated emerging markets 
and developing countries. Most banks are in the early stages of integrating envi-
ronmental factors into their internal procedures, offering only a few financial 
products in this field, because they believe other opportunities earn higher returns. 
Environmental finance faces a three-dimensional gap between needs and supply: 
instruments, funds and conditions. These, and the insufficient knowledge, lack of 
institutional capacity, and opportunity and start-up costs, constitute the challenges

for financial institutions entering the field of environmental finance. But success-

ful cases prove that there are significant advantages from approaches that at the 
same time address the demand for environmental finance and benefit both the fi-
nancial institution and the borrower.  
Increasing the range for such win-win situations will require substantial support 
from the international community, not only in the form of access to funds, but also 
in becoming more proactive by including environmental aspects in banks internal 
sustainability strategies. It will take enormous efforts for financial institutions and 
their international partners to capitalise on the fact that energy is money. More-
over, environmental protection means business – and money and business are 
bankable.  
1 The Relevance of Environmental Finance  
Environment – from renewable energy to resource efficiency, and from clean pro-
duction to climate change: these concerns have risen to the top ranks of the global 
agenda of politics, business and finance. Massive problems predicted by some ex-
perts for decades are materializing. High fuel prices, shortages of electricity, mas-
sive environmental risks in emerging economies and man-made climate change 
have moved from the debating table to reality. After decades of controversial dis-
cussions these issues are emerging as facts, becoming mainstream topics of 
thought and policy. What was an opportunity has now become a necessity: the fi-
nancial sector has to develop its approaches and instruments in order to make en-
vironmental finance a mainstream priority, responding to a challenge that is both 
local and global. 
This is of special importance to developing countries and emerging economies. 
It seems obvious that their paths and patterns of growth cannot simply follow the 
stages of the industrialized countries. Both have to leap over into a stage of sus-
tainable development. To ‘Ensure Environmental Sustainability’ is a Millennium 
Development Goal (MDG Target 7). Thus, environment is not something that is 
supplementary – it is an essential dimension of development, and environmental 
finance will have to be one of its crucial instruments.  
There is a strong case for ‘environmental finance’, a term used for a wide range 
of activities and instruments at various levels. These have in common that the ac-
tivities financed are supposed to contribute to the common good, which is ‘envi-
ronment’. From a financial sector perspective, this includes the direct financing of 
projects, (public) financial (dis-)incentive schemes, bilateral and multilateral pro-
jects and programmes, and global schemes such as carbon markets and global 
funds. ‘Environmental finance’ in reality is multidimensional, encompassing ob-
jectives, techniques, sponsors and regions, to name a few. 

Greening the Financial Sector: How to Mainstream Environmental Finance in Developing Countries by Köhn, Doris