As in many other countries, green bonds could significantly finance sustainable development in Bangladesh. A green bond is a popular tool worldwide for financing climate and environment-friendly sustainable development projects. Introduced by the European Investment Bank in 2007, and followed by the Word Bank in 2008, the green bond now boasts an admirable market size. It is similar to regular bonds of fixed-income debt instruments with a critical difference. The funds must be raised by issuing a green bond to finance projects that positively impact the environment.
Green finance and sustainable finance are types of financial activities that support the transition to a low-carbon, sustainable economy while addressing the global challenges we face today, such as climate change and emerging environmental and sustainability risks. Green finance involves financing projects and initiatives with solid ecological impacts, such as reducing greenhouse gas emissions and promoting renewable energy. On the other hand, sustainable finance integrates social, environmental, and governance (ESG) factors into investment decisions to promote long-term economic growth, social outcomes, and ecological sustainability. Green and sustainable finance aims to drive positive change by mobilising capital towards activities that promote sustainability and reduce negative environmental impacts.
Green and sustainable finance are essential for redirecting investments towards environmental-friendly projects and integrating ESG factors into investment decision-making. By incentivising investments in renewable energy, energy efficiency, and other sustainable initiatives, green finance and sustainable finance can help reduce greenhouse gas emissions, mitigate the impact of adverse climate changes, and help achieve a sustainable and resilient global economy that promotes long-term social and environmental well-being.
The central bank defines sustainable finance as any form of financial service that integrates environmental, investment, insurance, banking, accounting, trading, economic, financial advice, social, and governance criteria into business or investment decisions for the lasting benefits of both clients and society. It includes green finance, sustainable agriculture, sustainable cottage, micro, small, and medium enterprises, socially responsible financing, working capital and demand loan of green products, projects and initiatives, and priority green or eco-friendly products in the trading sector.
In a developing economic country like Bangladesh, entrepreneurs of green projects expect low-cost funds or soft loans from the funding agencies. The banking industry uses low-cost refinance opportunities from Bangladesh Bank for financing green projects, which needs to be improved considering the demand in the market. Besides refinance facilities, the banking industry uses depositors' money for funding green projects, which comes with a higher interest rate at the borrower's end due to the high cost of funds. The challenge the banking industry faces when financing green projects is maturity mismatch because of the long-term nature of green projects.
Thus, a green bond is designed to support specific climate-related or environmental projects and may come with tax incentives to attract investors. Though the term 'green bond' is often used interchangeably with 'climate bond' or 'sustainable bond,' there are some differences in these three categories of bonds. The green bond is a broader concept, whereas climate bond is 'specifically finance projects which alleviates the effects of climate change.' And, the sustainable bond defines finance or refinance or even both for social and sustainable projects.
Bangladesh is a late-comer in this arena of finance. The first was issued in 2021 by the Sajida Foundation, an NGO, for fund raising through the Green Zero-Coupon Bond worth Tk 1.0 billion. The goal was to enhance the outreach of its micro-credit programme and ensure environmental development. The second one is Beximco Green-Sukuk Al Istisna, worth Tk 30.0 billion, issued last year. The funds generated from the bond will be spent on installing two solar power plants and expanding a textile unit.
Apart from the remarkable policy formulated by Bangladesh Bank, green finance is still at a nascent stage in our country. The central bank has fixed eight sectors where banks and non-bank financial institutions (NBFIs) could provide finance by raising funds and issuing green bonds. The sectors include low-carbon electricity generation and transportation, heating and cooling, green establishment, and energy and resource efficiency in industry. The central bank has also fixed 88 types of activities under the eight sectors. Banks and NBFIs can implement various kinds of environment-friendly infrastructural projects like roads and dams using funds from the bonds.
The policy on green bond financing is essential for various reasons. First, it will guide the banks and financial institutions to select and invest in suitable projects. Banks will not invest in any project with some elements of environment or climate in name only but is not green or climate-friendly. They will avoid packaging any project by adding some components of the environment or sustainability to generate funds for another purpose.
Bangladesh faces energy challenges, and green bonds can be used to finance renewable energy projects like solar and wind farms. These projects help reduce the country's dependence on fossil fuels and contribute to a clean and more sustainable energy mix. Access to clean water and sanitation is a critical issue in Bangladesh. Green bonds can finance projects that improve water quality, waste-water treatment, and sanitation facilities, contributing to public health and environmental sustainability. Green bonds can support sustainable farming practices, such as organic farming, agro-forestry, and developing climate-resilient crop varieties. Green bonds can fund projects related to sustainable transportation, such as building public transit systems, bike lanes, and pedestrian-friendly infrastructure. These can help reduce traffic congestion and air pollution in major cities like Dhaka.
By issuing green bonds, Bangladesh can attract international investors interested in environmentally responsible projects. This can bring in foreign capital to support sustainable development initiatives in the country. The issuance of green bonds can raise awareness among investors and the public about the importance of sustainable development and environmental conservation. This can lead to more responsible investment decisions and environmentally conscious consumer behaviour.
Bangladesh is vulnerable to climate change and is afraid of natural disasters like cyclones and flooding. Green bonds can fund climate change mitigation and adaptation projects, such as building resilient infrastructure, flood control systems, and reforestation initiatives. Bangladesh has demonstrated global best practices on disaster risk management and is a dominant voice for climate-vulnerable countries. In 2009, Bangladesh was among the first nations to develop a Climate Change Strategy and Action Plan, which has become a blueprint for other climate-vulnerable nations. The government has implemented proactive policies and investment opportunities that strengthen resilience against climate-related disasters, leveraging community-led action. This has led to an early warning system for cyclones with more than 76,000 volunteers and the development of a coastal embankment system that protects over 6,000 km of vulnerable coastline.
Besides, government agencies can also lease such projects by providing the required money to the bond-issuer lenders. Individuals, corporate and government entities, banks, and NBFIs can purchase green bonds. The maturity period of the green bonds will be, at most, 15 years. Banks with over 10 per cent of non-performing loans cannot issue green bonds. This rule will not apply to state-owned banks. Lenders must maintain capital per the guidelines set by Basel III to qualify for issuing the bonds. If any lender has a record of facing a provision shortfall in the past two years, they will not be eligible to issue the bonds.
Apart from the issuing policies by Bangladesh Bank and government bodies involvement, the sustainable finance extended by banks rose nearly 40 per cent year-on-year to Tk 35,387 crore in the first quarter of 2023 as lenders keep disbursing a higher volume of loans to eco-friendly businesses and industries. The amount stood at Tk 25,290 crore in the identical January-March quarter of 2022, according to the Quarterly Review Report on Sustainable Finance of Banks & Financial Institutions of the Bangladesh Bank. In January-March, 19 banks and eight NBFIs surpassed the target of green finance, which was set at 5 per cent compared to the total term loan disbursement. Besides, 15 banks and 10 NBFIs managed to fulfill their target of sustainable finance compared to the total loan disbursement.
According to the report, 56 banks out of 61 and 13 NBFIs out of 34 had exposure to sustainable finance in the first quarter. Green finance of banks surged 65 per cent year-on-year to Tk 2,775 crore in the first quarter of 2023. However, it was down from Tk 4,050 crore reported in the October-December quarter, totaling Tk 1,689 crore in January-March 2022.
Green credits disbursed by non-bank financial institutions (NBFIs) more than doubled to Tk 839 crore in January-March this year compared to Tk 409 crore a year earlier. In 2022, banks and non-banks disbursed Tk 12,226 crore in green finance, up from Tk 7,232 crore in 2021. Similarly, sustainable finance rose to Tk 130,762 crore from Tk 82,551 crore in 2021. Such funding accounted for 8.04 percent of the total loans in 2021, 11.59 percent in 2022, and 13.77 percent in the first quarter of 2023.
To conclude, green bonds have the potential to play a pivotal role in financing sustainable development in Bangladesh by channeling capital into projects that address pressing environmental and social challenges while offering both domestic and international investors innovative investment opportunities. These bonds can help the country achieve its sustainable development goals while mitigating the adverse effects of climate change and promoting a more sustainable and prosperous future.
Ahmed Shamir Sakir is a banker.
ahmedshamir082@gmail.com