Green Finance: Any of a number of maker-based systems that factor environmental impact into risk assessment, or utilize environmental incentives to drive business decisions.

Green Finance In The Real World: Sometimes you have to go along to get along. So, welcome to Pocket MBA Green Month. Here at Pocket MBA, we'll distinguish between "going green" and the global warming/climate change debate. The latter is better left to science and, unfortunately, politics. And if there is anything better to signal a potential top in the global warming market than this newsletter going green, Pocket MBA doesn't know it, unless it's this report of a decade-long decline in global temperatures, which is leaving some warming advocates a little red-faced as they scramble to adjust their timetables for an incinerating earth.

Green Finance: Any of a number of maker-based systems that factor environmental impact into risk assessment, or utilize environmental incentives to drive business decisions.

Green Finance In The Real World: Sometimes you have to go along to get along. So, welcome to Pocket MBA Green Month. Here at Pocket MBA, we'll distinguish between "going green" and the global warming/climate change debate. The latter is better left to science and, unfortunately, politics. And if there is anything better to signal a potential top in the global warming market than this newsletter going green, Pocket MBA doesn't know it, unless it's this report of a decade-long decline in global temperatures, which is leaving some warming advocates a little red-faced as they scramble to adjust their timetables for an incinerating earth. Indeed, there's actually a school of thought that argues an ongoing decrease in sunspots augers in favor of sharp global cooling—just Google "sunspots" and "global cooling." And finally, there's the NASA scientist who testified in Congress the other day that the earth is about to burst into a ball of flames due to carbon emissions and that all oil company CEOs should be tried for crimes against humanity. Whatever.

The beauty of the Pocket MBA approach is that warming and cooling are irrelevant. What's important is the economics of going green. For Pocket MBA, green is still the color of money, even if it's also the color of environmental friendliness. So we'll be looking at the impact on green of going green. And we'll do it until Pocket MBA is blue in the face, or at least until August.

Pocket MBA had to stretch for a definition for this week's term. But define it must. The problem is that "green" is becoming as ubiquitous, and almost as misleading, as .com was in the late 90s. So just like every company wanted to be a .com to get in on the reflected glory of the era, so too now everyone wants to call what they do "green." It's only a matter of time before someone starts Greenizon.com, an online retailer that only sells green products using green finance.

If you Google "green finance," you'll find a hodgepodge of academics, skeptics and financial institutions all trying to explain the concept. Pocket MBA has concluded that green finance means different things to different financial actors.

There is green finance for both consumers and producers, with the primary driver being lenders. For consumers, green finance boils down to the private (non-governmental) effort to offer people and businesses incentives to reduce emissions or to attract the business of people that want to do so. On the producer side, green finance can be used by institutions either to discriminate in lending practices in favor of green projects or against environmentally damaging projects. It can also be implemented to use established (and growing) markets in emissions trading as a part of project financing. (And since the truth is that it's impossible to reduce pollution to zero in an industrialized world, this latter aspect may be the most economically impactful.) Anyway, rather than trying to nail a precise definition of green finance, it's better to look at some examples Pocket MBA found zipping around on the web.

In Australia, a company by the name of Green Finance (itself a subsidiary of another finance company), advertises what it calls a "no-cost, environmentally friendly, carbon-neutral finance program for cars and light commercial vehicles." That means that for every loan it issues, it will plant a sufficient number of trees to offset the carbon emission of the vehicle that is the subject of the loan. Green Finance says it is doing this "because we believe that every Australian can and should do something more to help the environment." And it claims to do this at no extra cost to the borrower. Here in the U.S., green publisher The Environmental Leader reported back in April that Countrywide Home Loans had instituted a program in a number of states offering a reduced mortgage rate (12 1/2 basis points) for buyers of certified green homes.

Both Green Finance and Countrywide Home Loans appeared willing to lose a few dollars of profit off their loan businesses in order to help save the planet. Of course, the companies must have anticipated some upside (at least from a PR standpoint) by doing this. The car lender hopes to entice more borrowers via an appeal to their consciences. And the company doesn't advertise that it offers better rates, in general, than other lenders; it may well be the most expensive lender in Australia for all Pocket MBA knows. As for Countrywide, well, the housing market in some parts of the U.S. is so dismal that anything might have been worth a try.

Those two examples focused on the consumer level. Green finance is also big business. Starting in 2004, Citigroup began a commitment to environmentally friendly lending. As part of its program, it even established "no-go zones," areas in which it would withhold lending because of environmental threats. For instance, Citi barred itself "from financing logging activities in tropical forests."

Finally, as long ago as 2003, Peter C. Fusaro of Global Change Associates, Inc., reported on the already developed U.S.-based, over-the-counter market in emissions-credit trading. He concluded that it would be via using those markets as an integral part of project finance that green finance would be the real solution for global pollution:

• [T]he key breakthrough for CO2 trading will be the use of the project finance mechanism to create “clean development mechanism” credits. In this way, a stream of emissions credits for 30 to 40 years (the life of the project) can be banked upfront. Investment and commercial banks can later create environment checklists for banks so that further streams of credits can be created. Finally, the creation of a global CO2 market will be traded on the Internet, as the Internet will accelerate trading, is cross border, and can bring the most players to the global marketplace. Green Finance is thus born as the solution for global pollution and greenhouse gas mitigation strategies through the use of financial engineering at its best.

This isn't much different from a bank planting trees when you buy a car. Instead, a bank will use a stream of emissions credits to offer as part of a financing package for a project: "Go with us, and we'll lend you $500 million and the right to pollute throughout the term of the loan, and the price of the right to pollute won't rise," or something like that.

In the end, green finance is simply another way to match willing lender to appropriate borrower. There's no magic just because it's called "green." To paraphrase greybeards Led Zeppelin, the business transaction remains the same. Supply and demand, baby, that's a whole lotta' love.