Empowering green growth through sustainable finance in Bangladesh

Sustainable finance is emerging as a powerful tool to promote green growth in Bangladesh.

Sustainable finance, which incorporates environmental, social, and governance (ESG) criteria into financial investment decisions, has emerged as a critical aspect of the global financial landscape. In Bangladesh, the promotion of sustainable finance is integral to addressing climate change challenges and fostering green growth. This article explores the various facets of sustainable finance, its impact on green growth, and the specific measures taken by Bangladesh Bank (BB) and other stakeholders to advance sustainable finance in the country.

Understanding sustainable finance
Sustainable finance entails the integration of ESG considerations into financial investment decisions. This approach leads to long-term investments in sustainable economic activities and projects, offering benefits to both clients and society. It has gained prominence as investors increasingly seek assets that adhere to ESG criteria, recognizing the positive social and environmental impacts such investments can have.

The Bangladesh Bank defines sustainable finance as any form of financial service that incorporates ESG criteria into business or investment decisions. This encompasses a broad spectrum of financial activities, including green finance, sustainable agriculture, sustainable cottage industries, micro, small, and medium enterprises, socially responsible financing, working capital, and demand loans for green projects and initiatives. These financial tools play a crucial role in driving the green growth agenda in Bangladesh.

The role of sustainable finance in promoting green growth
Sustainable finance is pivotal in promoting green growth by directing financial resources toward environmentally friendly and socially responsible projects and initiatives. Several aspects underscore the significance of sustainable finance in this context:

• Integration of ESG criteria: Sustainable finance helps integrate ESG criteria into investment decision-making. This ensures that investments are aligned with sustainable principles, fostering long-term growth while mitigating potential environmental and social risks.
• Sustainable agriculture: Financing sustainable agricultural practices enhances food security and reduces the environmental impact of farming. Investments in organic farming and agroforestry, for instance, can significantly contribute to green growth by promoting sustainable and environmentally friendly agricultural practices.
• Climate adaptation: Sustainable financing activities are directly associated with climate adaptation. They facilitate investments in climate-resilient infrastructure and technologies, which are critical for addressing climate change challenges.
• Circular economy: Sustainable finance supports the transition to a circular economy by promoting responsible resource use and waste reduction. This shift toward circular practices is essential for long-term sustainability.
• Green technology innovation: Sustainable finance plays a vital role in fostering green technology innovation. Investments in clean and sustainable technologies are crucial for reducing environmental impacts and driving economic growth.
• Risk mitigation: Sustainable finance helps reduce long-term financial risks associated with climate change and environmental degradation. By investing in the mitigation of potential future costs linked to environmental damage, it provides a safety net against unforeseen challenges.

Types of sustainable financial instruments
Sustainable finance instruments are financial tools designed to promote sustainable and responsible business practices and investments. They play a pivotal role in channeling financial resources towards environmentally sustainable projects, businesses, and initiatives. In the context of Bangladesh, several types of sustainable financial instruments are making their mark:

• Green loans: These are loans provided by banks and financial institutions to finance environmentally friendly projects or investments. Green loans offer borrowers flexibility and can be used for various green purposes, from renewable energy projects to eco-friendly initiatives in the trading sector.
• Social loans: Similar to green loans, social loans fund projects with positive social impacts. They can support initiatives such as community development, affordable housing, or education.
• Sustainability-linked loans: These loans have interest rates linked to specific sustainability performance targets or key performance indicators. Borrowers may receive a discount on their interest rate if they meet predefined sustainability goals.
• Green bonds: Green bonds are debt securities issued to fund environmentally friendly projects or initiatives. The proceeds from these bonds are allocated to specific green projects, such as renewable energy infrastructure, energy-efficient buildings, and clean transportation.
• Sustainability bonds: Combining aspects of green and social bonds, sustainability bonds finance projects that offer both environmental and social benefits. They can be used for a broader range of sustainable initiatives.
• Blue bonds: Blue bonds are associated with marine and aquatic ecosystems. They finance projects focused on marine biodiversity preservation, sustainable fishing practices, and ocean conservation.

Sustainable finance in Bangladesh: Progress and challenges
Bangladesh, due to its geographical location, is highly vulnerable to climate change. The country has recognized the importance of sustainable finance in addressing environmental and social challenges. The introduction of green banking guidelines in 2011 marked a significant step in promoting sustainable finance in Bangladesh.

One of the key drivers of sustainable finance in Bangladesh is the central bank, Bangladesh Bank (BB). BB has been at the forefront of efforts to expand the use of sustainable financing in the country. In July 2015, BB established a dedicated department to widen the application of sustainable finance, replacing the previous green banking and CSR departments. BB has selected 68 products across 11 categories to facilitate efficient loans under the sustainable financing program. These products encompass a wide range of areas, from solar home systems to organic farming.

Bangladesh Bank has set targets for financial institutions in the country to convert a specific percentage of their portfolio into green finance and sustainable finance. This directive encourages banks and non-bank financial institutions (NBFIs) to prioritize eco-friendly lending and investment.

Measuring Progress: Sustainable finance uptake
Official figures indicate substantial progress in sustainable finance in Bangladesh. Sustainable finance extended by banks increased by nearly 40 percent year-on-year to Tk 35,387 crore in the first quarter of 2023. Green finance provided by banks saw an even more impressive growth, surging by 65 percent year-on-year to Tk 2,775 crore in the same period. These figures reflect a significant commitment to financing eco-friendly businesses and industries in Bangladesh.

Non-bank financial institutions (NBFIs) have also played a role in sustainable finance, with green credits disbursed by NBFIs more than doubling from Tk 409 crore in the first quarter of 2022 to Tk 839 crore in the same period in 2023. Bangladesh's banking and financial sector appears to be actively embracing sustainable finance, with 56 out of 61 banks and 13 out of 34 NBFIs having exposure to sustainable finance in the first quarter of 2023.

Regulatory support for sustainable finance
Bangladesh Bank's active role in promoting sustainable finance extends to the regulatory framework. BB has introduced various policies and measures to incentivize sustainable financing activities among banks and NBFIs:

• Sustainability rating for banks and NBFIs: In 2020, BB introduced a Sustainability Rating, encouraging banks and NBFIs to incorporate sustainability into their operations.
• Green bond financing policy: BB issued a Policy on Green Bond Financing for Banks and NBFIs in 2022. This policy creates opportunities for financial institutions to participate in climate financing for both mitigation and adaptation.
• Climate risk fund allocation: BB has instructed banks and financial institutions to allocate 10 percent of their corporate social responsibility budget to the climate risk fund, further emphasizing the importance of addressing climate-related challenges.
• Challenges and the way forward
• While progress has been made, the sustainable finance landscape in Bangladesh faces several challenges:
• Capital and bond markets: The development of capital and bond markets remains a work in progress. The introduction of green bonds in the country's market is a significant step, but notable efforts are needed to strengthen the basic capital market and consolidate the green bond market.
• Coordination: The coordinated approach between BB and the Bangladesh Securities and Exchange Commission (BSEC) will be pivotal in shaping the sustainable finance market in Bangladesh. A synchronized effort is essential for achieving the country's green growth goals.
• Stakeholder collaboration: Effective collaboration among stakeholders is critical to advancing sustainable finance objectives. Government agencies, regulatory bodies, banks, financial institutions, institutional investors, individual investors, trade associations, communities, local governments, civil society organizations, media, and academic and research institutions all have vital roles to play in the sustainable finance ecosystem.
• Policy support: Sustainable finance requires strong policy support from government agencies to create incentives and supportive frameworks for promoting green growth through sustainable finance. A conducive regulatory environment can accelerate the transition to a sustainable, low-carbon economy.

Alignment with national and global goals
The policy and planning documents of Bangladesh underscore the necessity and implications of green and sustainable growth. These objectives align with the country's commitment to achieving sustainable development goals (SDGs) and are in accordance with international agreements, such as the Paris Agreement adopted in COP21. Bangladesh's Nationally Determined Contribution (NDC) roadmap and associated action plans reflect the alignment of its sustainable growth policies with global efforts to combat climate change and environmental degradation.

Sustainable finance is emerging as a powerful tool to promote green growth in Bangladesh. With a vulnerable geographic location and a commitment to addressing climate change challenges, the country has made significant strides in adopting sustainable financing practices. Bangladesh Bank's proactive role in setting policies and promoting sustainability across the financial sector has been instrumental in this progress.

The impressive growth in sustainable finance, including green loans and bonds, reflects a tangible commitment to eco-friendly investments. To overcome challenges and fully harness the potential of sustainable finance, stakeholders must collaborate effectively, and government agencies must continue to provide policy support. As Bangladesh advances towards its goal of green growth, the sustainable finance landscape is poised to play a pivotal role in shaping the country's sustainable and low-carbon future.