Untapped climate adaptation finance for Bangladesh

On May 27, 2024, Cyclone Remal struck coastal Bangladesh, causing extensive damage and affecting over 4.59 million people. The cyclone damaged approximately 150,000 households across 19 districts and inflicted significant financial damage, including crop damage worth BDT 10,595 million (USD 90.7 million). ReliefWeb estimated the financial support required for recovery to be around $1.64 billion. Cyclone Remal is one example of the ongoing climate change-induced disasters that threaten Bangladesh. On average, tropical cyclones cost the country about $1 billion annually. Bangladesh loses 1.3 per cent of its GDP annually to climate change, amounting to $4.65 billion in the 2021-22 fiscal year. Without effective action, these losses could exceed two per cent of GDP by 2030 and nine per cent by 2050. To address these challenges, Bangladesh must spend $8.5 billion annually on climate change damages. It requires $230 billion from 2023 to 2050 for its National Adaptation Plans (NAP) to protect vulnerable sectors and ensure sustainable development. Bangladesh’s efforts to integrate climate resilience into its development framework are commendable. The government has implemented proactive measures, such as the Bangladesh Climate Change Strategy and Action Plan (BCCSAP, 2009) and the Climate Change Trust Fund (CCTF, 2010), to mobilise resources for priority areas, including infrastructure, agriculture, water resources, and disaster management. The government spends approximately $1 billion annually on climate change adaptation efforts, representing 6 to 7 per cent of the national budget. However, this figure is significantly lower than the estimated annual fund requirement of $8.5 billion. Additionally, Bangladesh is exploring ways to increase climate financing, with estimates suggesting a need for around $12.5 billion in the medium term to address climate challenges effectively. Despite the government’s various efforts, the scale of financial requirements far exceeds the available public funds, necessitating alternative sources of finance. Bangladesh can explore three underutilised sources for climate adaptation finance to bridge the financial gap: the private sector voluntary contributions, Zakat funds, and Corporate Social Responsibility (CSR) funds. The private sector in Bangladesh, comprising businesses, financial institutions, and investors, holds significant potential to bridge the climate finance gap. According to the Bangladesh Bureau of Statistics, private investment contributed approximately 23.1 per cent to the GDP in the fiscal year 2017-18. The private sector, driven by innovative companies, has been a significant force behind the country’s rapid economic growth and is expected to continue this trend, aiming for Bangladesh to become a trillion-dollar economy by 2040. The service sector contributed 52.11 per cent to the GDP during the 2016-17 fiscal year. This sector can contribute significantly to the climate adaptation fund as a repayment of the country’s contribution to make it successful. Zakat, one of the Five Pillars of Islam, gives a fixed proportion of one’s wealth to those in need, usually 2.5 per cent of accumulated wealth over a lunar year. In a predominantly Muslim country like Bangladesh, Zakat has significant potential to contribute to poverty alleviation, social welfare, and economic development. Despite this potential, the full capacity of Zakat remains untapped due to a lack of systematic collection and distribution mechanisms. Research by Kabir Hassan (2024) shows that the service sector’s Zakat potential in FY 2018-19 was eleven times more than its value in 2000-01, with bank deposits in the current fiscal year being fourteen times higher than in FY 2000-01. Properly managing Zakat could significantly benefit Bangladesh’s economy and society. Studies indicate that the potential of Zakat could cover 21 per cent of the country’s budget and 35 per cent of the national revenue in the fiscal year 2019-20. Even one percent of Zakat potential fund can significantly contribute to combating climate change-induced hazards. Corporate Social Responsibility (CSR) funds also represent an underutilized resource for addressing climate change in Bangladesh. CSR involves the ethical responsibility of companies to contribute positively to society, including environmental stewardship. The banking sector in Bangladesh is actively engaged in CSR activities, with a significant focus on healthcare, education, and environmental issues. Recent guidelines from the Bangladesh Bank require scheduled banks and non-banking financial institutions (NBFIs) to allocate at least 30 per cent of their CSR funds to healthcare and 20 per cent to environmental and climate change-related initiatives. According to the Bangladesh Bank CSR Report (July-December 2023), 61 commercial banks spent over BDT 3500 million ($31 million) from their CSR funds, but only 4 per cent was spent on climate change-related incidents, which is far below the target set by the Bangladesh Bank. While the potential for private sector, Zakat, and CSR funds involvement in climate finance is substantial, several challenges need to be addressed: Regulatory and Policy Barriers: Inconsistent regulatory frameworks and policies can deter private investment. A stable and supportive regulatory environment is crucial for attracting private capital into climate-related projects. The government must ensure that policies are clear, consistent, and conducive to private sector participation. Capacity and Awareness: There is often a lack of awareness and technical capacity within the private sector to identify and implement climate-smart investments. Capacity-building programmes facilitated by public and private stakeholders can help bridge this gap and empower businesses to integrate climate resilience into their operations. Risk Perception: Climate-related projects are often perceived as high-risk, which can deter investment. Developing risk mitigation instruments, such as blended finance mechanisms and guarantees, can help de-risk these investments and attract private capital. Blended finance, which combines public and private funds, can effectively leverage private-sector investment. Public funds can absorb some of the risks associated with climate projects, making them more appealing to private investors. Bangladesh is a frontline country regarding global climate change impacts, with frequent natural disasters threatening its socio-economic stability. Despite challenges, investments in climate action yield high returns, with significant opportunities for the private sector, Zakat, and CSR funds. The Global Commission on Adaptation found that every $1 invested in key adaptation areas could yield $2-10 in net benefits. Additionally, the private sector has significant opportunities, with a potential adaptation market estimated at $2 trillion by 2026, according to the World Economic Forum. Md. Abu Nashir Khan, Assistant General Manager (Environment and Climate Change), PKSF certified expert on Climate Adaptation Finance. [email protected]