Following the global agreements on Sustainable Development Goals and how to address Climate Change, the world is now focusing on mobilization of necessary finance for the implementation of these agreed goals. Bangladesh is, certainly, a frontline country which is a major victim of climate change. Despite this challenging reality Bangladesh has been morally on a higher ground for committing resources from its own national budget for adaptation and mitigation of the challenges of climate change in addition to a number of green initiatives taken by its developmental central bank. In fact, Bangladesh has been far ahead of many countries in terms of commitment for transforming itself into a green country. I doubt if any other country put fighting environmental and bio-diversity challenges in its fundamental principles of state policy in its constitution. The article 18A of Bangladesh's constitution pledges that "The State shall endeavor to protect and improve the environment and to preserve and safeguard the natural resources, bio-diversity, wetland, forests and wild life for the present future citizens." This clearly reflects the higher ethical commitment of Bangladesh for the sustainable development years ahead of the contemporary global contract.
Moreover, Bangladesh's central Bank covered substantial ground in providing leadership for designing and implementing inclusive and sustainable finance through providing environmental and social risk management guidelines and as well as committing low-cost fund for green transformation of the real economy. It was indeed a rewarding experience for me as I could lead this endeavor of transformation from the front as a Governor of the central bank for a long period of about seven years. I was also chosen as one of the dozen members of the UNEP Inquiry for designing sustainable global finance. This was indeed a gratifying experience for a Governor of a low income country which has been going through the challenges of climate change and a number of other environmental disasters. I am happy to report on this Victory Day of Bangladesh that I could enthuse the bankers including the central bankers to change their mindset to commit themselves for channelizing finance for meeting the climate and environmental challenges as enshrined in the constitution. The commitment for making Bangladesh green has also been duly reflected in the words and actions of our Honorable Prime Minister who has been rightly awarded as the Champion of the Earth by the United Nations. We drew huge inspiration from her commitment for a green "Shonar Bangla."
Before I go further let me recapitulate some of the path-breaking ideas that we put into the UNEP Inquiry on Sustainable Finance. The Inquiry Report clearly identifies the need for mobilizing and channelizing financial resources for transforming the real economy which ought to become more environment and climate-friendly.
According to this Inquiry Report,the core purpose of the financial system is to serve the real economy- providing a range of services to households, entrepreneurs, and public authorities. However, the overarching concept of Sustainable Development has reframed (at least to a significant extent) this historic relationship inserting new parameters that are related to inclusiveness, poverty elimination, and respect for planetary boundaries. The goal of sustainable development has generated new demands from the financial system. These expectations revolve around a set of transmission channels that call for large-scale mobilization as well as mainstreaming of environmental and social factors. Actions in the Financial System are in turn also shaping the environmental and social outcomes in the real economy via a set of response channels, notably market leadership along with policy and regulatory measures and institutional cooperation.
The question that inevitably follows this is, "what are the measures that need to be delivered?" Five aspects are to be addressed on a priority basis. Firstly, there are the efforts to reallocate capital. The Financial System (i.e. the regulators and the key players) need to reallocate the capital in favor of environment-friendly endeavors (i.e. enterprises that have a sustainable approach). Second, comes the management of environmental and social risks of the enterprises. Degradation of environment generates risks for financial assets and institutions, and hence financial policy and regulation must focus on understanding the scale of these risks and then put in place measures that strengthen the 'safety and soundness' of the FIs against such shocks. Thirdly, there are the responsibilities of the financial institutions.
Acknowledging the fact that environmental, social and governance factors have a direct relationship with the value of on investment. Financial institutions, therefore, need to consider these factors as appropriate components of the fiduciary's analysis. The fourth area of concern is reporting and disclosure. Enhancing reporting (to clients and regulators) is fundamental for establishing sustainable financial systems. This enables the consumers to pick the right financial product. Reporting is a bridging action focused on improving information flows between the real economy and the financial system. Last but not the least is having a roadmap with strategies (short-, mid- and long-term) of transforming the entire financial system in a sustainable manner.
Given this context, it is hearting to see a comprehensive study on "Financing Green Growth: Challenges and Opportunities "has been prepared by Adam Smith Institute with support from DFID. The Report carefully identifies different sources of green finance in Bangladesh and provides an insight into the green finance landscape in the country in general. In addition, the report presents the challenges faced by the financial institutions in internalizing green finance as well as identifying opportunities for accessing green finance from internal and external sources. The report rightly indicates that Bangladesh has only secured a meagre amount of international climate finance for green growth. On the contrary, as I have already flagged, it has made a substantial contribution from its own budget for adaptation and mitigation of climate challenges despite it being one of the front-line victims of climate change. This has put Bangladesh on a higher moral ground. The report has also made some useful observations and recommendations on the role of the financial sector, particularly the banking sector in meeting the climate challenges. Simultaneously, it has pointed out that the country's capital market is far from the required level of sensitivity towards promoting climate-friendly bonds and other finances.
Banks can certainly play a particularly useful role in promoting green finance. Firstly, banks provide finance, a critical input for business operations. Thus, banks are in a strong position to not only encourage their clients to go for green technology and practices, they can also provide finance for this. Secondly, due to their intensive interactions with the clients' banks are a great source of information on the business sector. They know very well what is going on at the micro-level. They can thus provide very good policy advice (about green growth). They can also work as knowledge-brokers. They can inspire and inform their clients by telling them about what other clients are doing in the area of green growth.
To ensure effective promotion of green growth by the commercial banks, the developmental role of the central bank is pivotal. The central bank can strengthen green financing capacities of the commercial banks by setting up refinancing facilities for green growth. It can, through moral persuasion, trigger the financial sector's interest in green finance. The central bank can use its supervisory apparatus to generate information on whether banks are doing enough to promote green growth. The central bank can ensure that information generated by the commercial banks are used in relevant policy-making to create an enabling green business environment.
Due to prudent initiatives of the Central Bank (coupled with potent support from the government), Bangladesh has been placed on the global map by championing the developmental role of central banks in advancing financial inclusion and green finance. Bangladesh Bank has launched a refinancing scheme for green products, and the amount disbursed almost doubled between 2012 and 2016 (from 478 million BDT to 920 million BDT). The sectors receiving the highest amount of credit under this initiative are environment-friendly brick kilns, renewable energy, green energy and liquid waste management. Bangladesh Bank's issuance of the environment and social risk management guideline is also a prudent move to bar financial institutions from financing projects involved in carbonization of the economy.
Besides introducing environmental screening of borrowing proposals, Bangladesh Bank's green financing initiative is also proactively supporting financing of green investments for renewable energy generation, effluent treatment, and adaptation of new energy efficient, emission minimizing output processes and practices, with low cost refinance lines for lenders from a BB window funded jointly by BB and an external development partner. Green projects thus supported with refinance include solar home systems, solar mini-grid, solar-powered irrigation, solar PV panel assembly, bio-fuel, effluent treatment, replacement of polluting brick baking kilns with energy efficient ones, organic compost, pico-, micro- and mini-scale hydropower, PET bottle recycling, solar battery recycling, LED bulb manufacturing, and so forth. The Green Transformation Fund amount USD 200 million for the greening of our primary export industries (RMG, leather) is yet another smart move by Bangladesh Bank and deserves to be earnestly implemented. MoU has been signed with FIs. They need to move faster for implementation like This will help Bangladesh in branding itself as a source of green textile and leather export products.
While the steps taken by Bangladesh Bank are being widely acclaimed both at home and abroad, it also has to be acknowledged that there are numerous challenges ahead. These include- inadequate demand, lack of skills, perceived high risk, high costs etc. The environment in the capital market is also not favorable to consider that as a new entry point to greening the stock market.
The role of financial sector in confronting the challenges of climate change is undoubtedly receiving unprecedented attention in the global policy arena. Regulators are working together with commercial banks all over the world for enhancing green finance. In China, the central bank is making full use of its convening and signaling power to advance the country's very ambitious domestic green finance initiatives. In Netherlands, the country's pension industry alongside its banks and insurance sector is advancing a national sustainable finance dialogue and strategy. Similarly, The Financial Stability Board, the Bank of England's Governor is the chair has established the Task Force on Climate-Related Risk Disclosure. BOE has also transformed insurance sector to integrate climate change in risk assessment.
Developing countries are adopting green finance strategies at par with their developed counterparts. For example, Kenya has become a global leader in terms of digital finance, which now underpins the country's growing eco-system of green financing innovations connecting mobile payment platforms, distributed solar and now also crowd-sourcing blockchain and crypto-currencies. The Indonesian Financial Regulatory Authority has championed perhaps the world's first 'sustainable finance roadmap', and in Brazil, the powerful bankers' association is championing the greening of the country's banking community.
Now back to Bangladesh's efforts regarding green finance.While celebrating our achievements, we must also acknowledge that there is still a long way to go. To increase highest policy level involvement in the process of greening the financial sector, a dedicated wing under the Ministry of Finance has been recommended by the authors of the Adam Smith Institute. I am fully on board on this recommendation. This wing may formulate policy frameworks for greening the financial sector in alignment with the macroeconomic objectives of the country as a whole. But any such process must leave adequate space for private sector actors (including the innovators) to engage in the policy discourse. This will ensure demand-driven solutions to the problems at hand.
Private sector funds are to be leveraged in the capital and bond market to promote green growth. Bangladesh Securities and Exchange Commission (BSEC), as well as Bangladesh Bank, have to play their mediating roles as relevant regulators. They can also ensure proper incentives for the private actors to motivate them to make early moves for green transformation. For example, a list of banks and FIs having good green financing record can be published and they may be awarded better CAMELS rating accordingly.
I have seen from a close quarter that how could Bangladesh Bank ensure support for agriculture sector through subsidized credit for spices cultivators and cattle rearing households. Why then the same model may not be followed for green entrepreneurs as well?.Currently 10 percent of CSR expenses of the banks are going to green endeavors. This ratio should ideally be raised to 25 percent. This will encourage small-scale entrepreneurs to innovate more in the field of green enterprises. Similarly, we can transform a whole township into solar entity by encouraging the government and electricity distribution companies to introduce net meters with adequate incentives. If you cell electricity generated from your rooftop solar panel to the national greed you will get twenty five percent higher price than when you buy from it.
We in Bangladesh have not yet been able to source international finance dedicated to climate and sustainable finance to the desired level of expectation. A strong fiduciary management system with sound parliamentary oversight can help us in this regard. Fortunately, Green Climate Fund has recently recognized IDCOL as Bangladeshi accredited NIE (National Implementing Entities) which can access this fund.
Like the traditional finance options, the green options may also bring up issues of concerns (like risks to bio-diversity from big hydropower projects, pollution hazards from storage batteries in off-grid solar power usage and so forth). A well-chosen mix of the traditional and the new green options, consistent with a country's immediate needs and future growth aspirations, will need to co-exist. The core objective in this case will have to be energy efficiency to minimize carbon emission.
Rooppur Nuclear Power Plant project, if properly implemented along with adequate safety compliance, which I am told is on the top of the agenda of Bangladesh, will add significant value towards generating a substantial amount of green energy.
In addition, we need to organize groups of small and medium entrepreneurs involved in producing and distributing green products and facilitate to have mainstream access to finance using state of art digital technology (for example, connecting them to Apps and an intermediary partner) and appropriate business solutions. This partnership matters a lot if we really want to be yet another success story in achieving SDGs as we have been able to in case of achieving MDGs.
This, however, cannot be a sprint. This has to be a caravan with participation of all stakeholders including the government. I am confident that the financial sector can rise up to the occasion for transforming our country into a green "Shonar Bangla" if it is allowed to play its desired role more independently.
*The author is a Professor of Development Studies, Dhaka University and a former Governor of Bangladesh Bank. He can be reached at [email protected]