Even though unprecedented geopolitical tensions are overwhelming the global leaders in not focusing on the biggest global crisis called growing climate change challenges, the climate compassionate leaders both in the public and private sectors are not sitting idle. They are investing more, though not as much as needed, in R&D (research and development) to further innovate in technologies to capture carbon and store it in addition to developing more renewable energy alternatives. Thanks to the historic Paris Agreement and significant policy deliberations in subsequent COPs (Conferences of Parties), particularly that in Glasgow in launching Glasgow Financial Alliance for Net Zero (GFANZ) and the Just Energy Transition Partnerships (JETPs) committing for high-profile international climate finance initiatives, there is more hope than denial among the big corporates and the states to align their current and future investments with aspirations of a climate-friendly financial landscape.
Given this perspective, it can now be confidently argued that climate change can severely affect economic growth and pose a serious threat to the sustainability of economic gains is a widely acknowledged reality in contemporary development discourse. Estimated losses incurred by the global economy over the next 30 to 70 years (i.e., by the end of the century) in the case of not ensuring proper measures (adaptation and/or mitigation) vary across different sets of experts. Yet, it is agreed by one and all that global economic gains cannot be sustained to desired levels without addressing the climate change-related challenges. A 2015 report by the OECD titled "The Economic Consequences of Climate Change" projects 1.0 percent to 3.3 percent of global GDP to be impacted by climate change by 2060 in the absence of effective climate change action. The report further points out that crop yields and labour productivity will suffer the largest negative consequences of climate change over the said period (losses equivalent to 0.9 per cent and 0.8 per cent respectively). Of course, the level of possible losses varies across different regions and economies of the world. It is feared that these losses are likely to be highest in Africa and Asia. GDP losses in South- and South-East Asian regions are likely to range between 1.7 per cent and 6.6 per cent (significantly higher than the global average impact).
It must, therefore, be acknowledged that climate change poses a larger threat to many developing economies compared to the developed ones as the latter can invest more in technologies to reduce carbon emissions through achieving more efficient carbon capture and energy uses. In the case of Bangladesh, for example, a World Bank report of 2022 (Bangladesh Country Climate Development Report) states that by 2050 one-third of the country's agricultural GDP may be lost due to climate variability and extreme events, and 13.3 million people may become internal migrants over the next three decades.
Of course, Bangladesh's achievements in terms of adaptation and disaster management must be acknowledged. Yet, it must also be acknowledged that further efforts will be required for meeting the short-term and long-term challenges of climate change. That is why the World Bank's Vice President of South Asia, Martin Raiser says- "Bangladesh has led the way in adaptation and disaster risk management. … But with ever-increasing climate risks, further adaptation efforts are vital, and a low-carbon development path is critical to a resilient future for Bangladesh." And finance will be playing a pivotal role in ensuring that Bangladesh economy adheres to 'a low-carbon development path', because the country, as per World Bank estimates, will require at least USD 12.5 billion (around 3 percent of its GDP) in the medium-term for climate action. No doubt, both IMF and the WB have been committing additional resources for climate-friendly development ambitions in Bangladesh. The Asian Development Bank and many bilateral development partners including the European, particularly Scandinavian and Japanese, development agencies have been openly committing their support for climate-friendly sustainable development in Bangladesh. It may be noted here that the ongoing IMF programme in Bangladesh includes a billion dollar-plus funding support from its Resilience and Sustainability Trust (RST). Similarly, Germany is providing significant support for promoting renewable energy in Bangladesh.
It is obvious that there is no alternative to considering climate change as a central caveat of development discourses of Bangladesh and other developing economies. This naturally establishes the importance of climate finance in those discourses. This is where the "developmental role of central banks" becomes especially relevant. Surely, the green budget support alone cannot address this gigantic climate change challenge. The private sector must be roped into this climate-friendly development where the central bank can play a deciding role in motivating them to go for desired sustainable development projects with climate finance opportunities created by it. And here comes the significance of developmental central banking.
The concept of developmental central banking became more prominent in policy and practices (of both developed and developing economies) following the two World Wars when central banks would focus more on facilitating aggregate demand and employment behind a wall of capital controls. Of course, the rise of the Washington Consensus in favour of more liberalisation in development policies pushed by the IMF and WB focusing on 'Inflation Targeting' (in the 1980s and later) pushed the ideas and practices of developmental central banking backward. Yet, with the global financial crisis of 2008 followed by the COVID-19 pandemic-induced economic turbulence, the world witnessed central banks intervening to support a growing range of markets and activities, using instruments that extend well beyond interest rates and open market operations. Professor Barry Eichengreen of the University of California puts this return of developmental central banking as - "Monetary authorities are increasingly expected to address issues such as climate change and inequality, over the objections of those who insist that central banks' narrow mandate is what sustains their operational independence. But ignoring these issues, or saying they're someone else's problem, is no longer an option."
One most often finds climate change adaptation and/or mitigation-related discourses overwhelmed with recommendations/suggestions emphasizing carbon pricing and other fiscal policies. Of course, such fiscal measures are necessary, but certainly not sufficient. According to eminent New Keynesian Economist Joseph Stiglitz, multiple market failures and public policy constraints brought about by climate change cannot be corrected by a single intervention (e.g., imposing a carbon tax). This implies -- carbon pricing and other fiscal measures while necessary must also be complemented with monetary policy measures to effectively and sustainably deal with the challenges of climate change. That is, the developmental role of the central bank must be an integral part of the strategies to cope with climate change. Unfortunately, international initiatives like the COPs are not highlighting this critical role of the central banking despite it's more than obvious contributions during the above crises.
The importance of the developmental approach of monetary policy for combating climate change is indeed obvious. Yet, to better understand the need for a green monetary policy, one must comprehend how climate change affects the efficacy of conventional monetary policy by slowing output growth and heightening inflation volatility and uncertainty. Climate change challenges the policy capacity of the central banks by affecting every institutional transmission channel via injecting shocks and expanding shocks. These climate change-related risks can be both physical and transitional. Physical risks range from destruction of capital stocks to reduction in consumption/investment. The transitional risks refer to risks associated with policy measures to move towards a low-carbon economy. Hence, climate change should be a part of monetary policy as it influences the central bank's mandate to deliver price stability, economic growth, and a sound financial system over time. And, hence the significance of developmental central banking.
Developmental central banking considers the physical and transitional risks associated with climate change. Consequently, it not only safeguards investments against short-term effects of climate change, but also ensures long-term sustainability of those investments. Developmental central banks are to leverage the general agreement among the policymakers to combat climate change (through greening and/or decarbonization of the economy) to channel finance to environment-friendly endeavours. Central Banks (in developing and developed countries alike) adhering to the developmental trajectory usually leverage their monopoly over the money market to direct concessional credit to green endeavours (See Amit Roy, ' Green monetary policy to combat climate change: Theory and evidence of selective credit control', Journal of Climate Finance.2034). This, on one hand, makes sure investments remain better protected against physical risks arising from climate change (e.g., flood resilient buildings receive concessional credit). On the other hand, developmental central banks also ensure smooth transition towards a green/sustainable economy (e.g., green RMG factories in Bangladesh have been prioritized for finance by the central bank and top performing banks in climate finance have been regularly awarded).
Like its success in climate change adaptation and disaster management, Bangladesh has also been a pioneer in terms of developmental central banking with an emphasis on sustainable and/or green finance. Bangladesh's central bank (Bangladesh Bank) put forward its first set of guidelines for green banking in as early as February 2011, which stipulated all commercial banks (and later other NBFIs) to undertake and report green banking activities. Bangladesh Bank itself introduced refinance lines for banks against their loans to environmentally beneficial projects at concessional rates. Eminent economist and Professor of Economics, University of Massachusetts-Amherst, Gerald Epstein sees these early moves toward green financing by Bangladesh Bank to be pivotal to "promote financial stability by channeling credit away from destabilising activities and toward productive investments". Despite some ups and downs, Bangladesh has maintained its course in line with the developmental agenda. Owing to this consistency, green banking is becoming increasingly prominent in the country. Between 2017-18 and 2022-23, green finance increased at a compound annual growth rate of 16 per cent (from BDT 71 billion to BDT 150 billion). Despite many governance-related challenges and higher non-performing assets in some banks in recent years, the central bank of Bangladesh continues its support for sustainable finance policy.
While Bangladesh's achievements in terms of green/sustainable finance as well as developmental central banking is commendable, there remains significant challenges on the path ahead. This is because, on one hand, the country is among those most vulnerable to climate change effects. On the other hand, as Bangladesh becomes a developing economy, it will likely lose many of the preferential accesses to the global marketplaces. Fortunately, this dual challenge can be addressed potently with a single (yet complex nevertheless) set of monetary moves focused on developmental central banking. Bangladesh Bank may attain the dual objective of safeguarding the economy from adverse effects of climate change and bolstering international demand for Bangladeshi goods through promoting green growth. Simultaneously, the fiscal policy must complement the monetary policy to encourage climate finance for the ever-widening role of the state and the central bank in attaining our desired collective climate futures.
The writer is an Emeritus Professor of Dhaka University and former Governor of Bangladesh Bank.
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