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Bangladesh's green finance revolution: pioneering environmental responsibility

Fatema Tuz Johora | November 26, 2023 00:00:00

In an era when environmental sustainability is of paramount importance, Bangladesh has taken commendable strides in integrating green finance into its economic landscape. The global spotlight now shines on this South Asian nation for its proactive approach to aligning financial policies with environmentally responsible practices. The International Finance Corporation (IFC), a member of the World Bank Group, recognised Bangladesh as a leader in the adoption of green finance policies, attracting substantial investments from multilateral and bilateral agencies.

Green Finance: A game-changer for Bangladesh: Bangladesh, a country already grappling with the adverse impacts of climate change, has recognised the pressing need to shift towards more environmentally responsible financial practices. With the introduction of green finance policies, Bangladesh is embarking on a transformative journey toward sustainability and resilience. But the path to a sustainable financial ecosystem is not without its challenges.

Challenges in green finance adoption: Despite the increasing demand for green finance lending, Bangladesh encounters several hurdles in its development. Chief among these challenges is the limited awareness and understanding of green finance principles and their potential advantages among both lenders and borrowers. Lenders may often perceive green projects as riskier than traditional endeavours, primarily due to their unfamiliarity with the associated technologies and potential regulatory uncertainties. Additionally, borrowers may confront obstacles in accessing green finance due to higher interest rates and more stringent eligibility criteria.

One of the major obstacles is the discrepancies between Bangladesh's green finance policies and international standards, notably the Multilateral Development Bank (MDB) Taxonomy, which can impede alignment with global investment opportunities.

Sustainable finance policy, implementation, success, and gaps: The Sustainable Finance Policy for Banks and Financial Institutions, established by the Bangladesh Bank in 2020, defines the taxonomy for sustainable finance and green finance, and it also provides incentives and targets for banks and NBFIs to offer loans for 68 green products, projects, and initiatives. While Bangladesh Bank conducts a sustainability rating of top banks and NBFIs, the methodology for this rating is not disclosed, and the data is not available for independent agencies to validate.

Promoting sustainable finance with MDBs: MDBs play a crucial role in financing various sectors in Bangladesh, including infrastructure, ready-made garments (RMG), education, energy, and agro-processing. To encourage transparent reporting in annual reports and ensure accountability for public funds, MDBS needs to increase investments in Bangladesh's private banks.

The IFC has identified Bangladesh as an attractive market for foreign investments due to its timely repayments to clients, making it a good candidate for receiving investments from MDBs. This has resulted in a shift from trade-finance-related investments to financing in other areas, including infrastructure, RMG projects, energy projects, working capital solutions, enterprise development, small and medium enterprise (SME) development, and more.

Policy gaps and sustainable finance: A closer look: Differences between Bangladesh's Green Finance Policies and the MDB Taxonomy are evident in crucial aspects. The Bangladesh Sustainable Finance policy takes a comprehensive stance, emphasising sustainable development beyond climate impact. Both the Bangladesh Sustainable Finance and Bangladesh Green Refinance policies specify particular technologies and products, deviating from a more comprehensive taxonomy. This targeted approach may pose challenges in financing cutting-edge technologies like energy storage or emerging renewable sources such as geothermal or tidal energy. Notably, Bangladesh's policies lack explicit references to substantial impact measurements on emissions, a stark contrast to the MDB Taxonomy's stringent criteria.

Examples of empowering green finance: In a significant endeavour aimed at addressing existing gaps, Innovision Consulting Private Limited has taken a pioneering step in supporting a local private commercial bank's capacity building for green finance. Backed by a development agency and supported by an investment firm, this project encompasses a range of tailored interventions.

The consultancy conducted an intensive training program for over 180 bank employees, delving into the intricacies of climate risk assessment and the importance of green finance in mitigating environmental impact. A workshop focused on aligning the bank's green loan portfolio with international standards, ensuring compatibility with global investment opportunities. Additionally, specialised training equipped credit and sales teams to effectively identify, promote, and evaluate genuine green loan applications. Furthermore, the consultancy provided expert guidance to the bank's Finance and Sustainability Department, offering training on reporting and communicating a climate action plan following established guidelines.

To enhance visibility, marketing, and branding support was extended, aiding in the creation of promotional materials for green and climate-related products. A dedicated workshop engaged senior management, securing their commitment to green lending practices. The IT System Integration initiative adopted the bank's IT system for precise recording and reporting of green loans, ensuring a seamless integration of sustainable practices. All workshops and training sessions followed the Training of Trainers (ToT) model for sustainability. Additionally, Innovision has designed a checklist for assessing green and climate-related loans, a groundbreaking initiative in the Bangladeshi banking sector, promising enhanced scrutiny and accountability.

Green finance: A global imperative: In a world of unprecedented environmental challenges, Bangladesh's commitment to green finance shines as a beacon of hope. As we look ahead, the global sustainable finance market is set to skyrocket; the Precedence Research stated that the global sustainable finance market size accounted for $ 4,562.85 billion in 2022 and it is expected to hit around $ 29,111.04 billion by 2032, underlining the significance of green finance in the coming years.

Bangladesh, with its proactive stance against the escalating impacts of climate change, is primed for a future of resilience and sustainability. The government's visionary initiatives and the Bangladesh Bank's unwavering support establish a strong foundation for adapting to the evolving climate landscape and harnessing the vast potential of sustainable investments. This strategic approach places the financial sector at the forefront of nurturing resilience and harnessing the opportunities brought about by the global shift towards environmentally responsible finance. The journey towards sustainability is well underway, and Bangladesh is leading the way, proving that sustainable finance is not just a choice but a necessity for a brighter, greener future.

Recommendations for a sustainable future: To foster sustainable finance in Bangladesh, it is imperative to contemplate the subsequent pivotal strategies. Initially, it is imperative to advocate for a greater prevalence of investments supported by MDBs in sustainable finance initiatives within the nation. By capitalising on Bangladesh's track record of punctual repayments, this strategy positions the country as an appealing prospect for foreign investments. Concurrently, it is advisable for prominent financial institutions in Bangladesh, especially those that have received higher sustainability ratings, to examine their most effective strategies and pinpoint domains that require enhancement among other financial intermediaries.

It is imperative to advocate for the harmonisation of the sustainability taxonomy of the Bangladesh Bank with globally recognised standards. This entails the explicit inclusion of climate change as a crucial thematic element. This alignment would promote uniformity in sustainable finance practices and streamline reporting and compliance procedures for financial institutions. It is critical to advocate for transparent timelines and practices to ensure the successful integration of the Task Force on Climate-related Financial Disclosures (TCFD) policy into the financial sector, while closely monitoring its implementation.

Furthermore, the issue of addressing the prevailing lack of awareness about sustainable finance among bankers and financial sector employees. Implementing awareness programs and training sessions at all levels within the financial industry will help mainstream sustainable finance as a viable business strategy. Collaborating with other civil society organisations can amplify the voice of civil society in advocating for sustainable finance policies.

Green finance advocacy efforts will be bolstered by investments in research and data collection that compile evidence-based information on the effects of sustainable finance initiatives in Bangladesh. Through the strategic implementation of these recommendations, substantial progress can be achieved towards the establishment of sustainable finance policies and practices in Bangladesh. This, in turn, will foster a financial sector that is more conscientious of environmental and social issues. Bangladesh is significantly progressing towards a more environmentally sustainable future, and its progress serves as an inspiring model for other nations to emulate.

The author is a Portfolio Manager of Inclusive Financial Solutions at Innovision Consulting Private Limited. She can be reached at [email protected]

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