Developing environmentally sustainable banking

Policy makers in many countries are giving priority to 'Environmentally Sustainable Banking' or 'Green Banking'. In response to the policy initiatives, an increasing number of banks around the world are going green by offering innovative green products, saving resources and supporting the activities that help conserve environment. Though a good number of financial institutions and banks in developed countries have been demonstrating their commitment to the earth through green activities, the status of environmentally sustainable banking has not been satisfactory in most developing countries largely due to poor enforcement of existing laws and inadequate pressure from civil society and interest groups. Nevertheless, initiatives of central banks in some developing countries have created supportive environment to undertake green activities and Bangladesh is one of those countries.
Conceptually, environmentally sustainable banking can be linked with the concepts of public goods and externalities. Generally, a section of society directly and the entire society indirectly are the beneficiary of the 'external benefits' offered through environmentally sustainable activities of banks. Thus, as a whole, the ongoing green banking initiatives by different stakeholders is a Global Public Good where society as a whole is the target beneficiary. In regard to the external benefits, green banking clearly has a direct, positive effect on the environment, but the benefits go much further, reaching into security and cost. To offer effective sustainable practices, banks require support of other stakeholders. Government and Central Bank should play the role of torch-bearers; banks need support of consumers and business houses; and the media and environmental NGOs (non-governmental organisations) are expected to play the role of pressure groups.
Broadly, environmentally sustainable banking rests upon five pillars. The first one is related to the 'green vision' of a bank. The second and third pillars are connected with banks' in-house activities, and operation and financing. These are connected with a bank's green efforts to minimise environmental risks and saving scarce resources. The fourth pillar is concerned with supporting other stakeholders and cooperation. Pillar five is about green reporting. Green Banking does not only mean including something in the banking activities, but also excluding a set of activities that may cause environmental degradation. 'Sufficient Incentive', both positive and negative, is a crucial condition for the development of environmental practices by banks. The mandatory provisions or legal imposition may not work for long and it is important to convert regulation-driven approach to market-based approach for long-term effective environmental protection.
The comprehensive circular of the Bangladesh Bank (BB) on 'Policy Guidelines for Green Banking', issued in February 2011, is the most notable step on the way to developing environmentally sustainable practices in the banking sector of the country. As per the circular, alongside introducing internal environment management, the banks are expected to introduce environment-friendly green financing to address the environmental challenges of the country. Banks are to create a climate risk fund to finance economic activities in areas prone to flood, cyclone and drought at the regular interest rate without charging additional risk premium. The circular requires banks to publish independent Green Annual Report following internationally accepted format like GRI (Global Reporting Initiative) with the arrangement of external verification. Bangladesh Bank also prepared and circulated a Guideline on Environmental Risk Management in 2011 to streamline solutions for managing environmental risks. It prescribes a set of sector-specific 'Environmental Due-diligence Checklist' for financing environmentally sensitive sectors by banks. Some refinance schemes of the BB to finance solar energy, bio-gas plants, effluent treatment plants (ETP) and Hybrid Hoffman Kiln (HHK) in brick field have already started contributing. Bangladesh Bank also issued several circulars to support financing and other support activities in the disaster-prone areas of the country.
Other than the policy and guiding support from BB, a congenial market environment with active support from the government, businesses, NGOs and consumers are crucial for the development of Green Banking practices in the country. The Government of Bangladesh has taken some measures for improving environmental governance. Recently, a Monitoring and Enforcement Cell has been set up in the DOE (Department of Environment) to monitor the compliance of conditions set out in the environmental clearance certificate. Moreover, a special project named 'Clean Air and Sustainable Environment' has been undertaken to identify the sources of air pollution and work out necessary action plans to reduce pollution level in Dhaka. It is encouraging that the DOE is increasingly becoming active and has recently taken punitive measures against polluting industrial units.
A vulnerable area in Bangladesh is inadequate response and awareness among consumers on Green Banking. Market surveillance by consumer organisations is also very limited. However, a few NGOs are actively involved in the environmental sectors. They are doing research and advocacy, and acting as pressure groups.
Responding to Bangladesh Bank's initiatives, commercial banks have introduced environmental policies and Green Banking Cells. A number of banks have created climate risk funds. Introducing Green Office Guide is a noticeable step; however, only a few banks have taken initiatives in regard to resource inventory preparation and savings of paper, water and power, etc. Some banks are found to have provision of maintaining inventory of the resource used or consumption of energy and power. A good number of banks are using refinance facilities of the Central Bank to finance renewable energy activities. There is no doubt that the BB's initiatives have brought remarkable change in terms of awareness and approach of banks. A few banks have some inspiring initiatives for in-house waste management and financing.
A comprehensive incentive structure is yet to be developed to support green banking activities in the country.  Though some incentives have been declared in the Green Banking policy framework, more regulatory incentives are needed.

Dr. Shah Md. Ahsan Habib is Professor and Director, Bangladesh  Institute of Bank Management (BIBM).
ahsan@bibm.org.bd