Devising ways to obviate decline in green financing

The recent decline in green and sustainable financing by banks and financial institutions (FIs) poses a significant challenge to achieving environmental sustainability. While a handful of private banks have managed to maintain or even exceed their targets in funding green projects, the broader trend reveals a concerning drop in green financing across the banking sector. According to a report carried in the Financial Express (FE), green and sustainable financing witnessed a sharp decline in the third quarter of 2024 due to reduced loan disbursements. During the July-September period, banks contributed Tk 65.85 billion to green financing, marking a 5.64 per cent decrease compared to the previous quarter. Non-bank financial institutions fared even worse, with their contributions plummeting by a staggering 78.64 per cent to Tk 2.12 billion. Furthermore, a central bank report highlighted a contraction in overall sustainable finance, with banks disbursing Tk 1,042.4 billion-an 8.4 per cent drop from the preceding quarter-and FIs disbursing Tk 16.313 billion, down by 45.48 per cent.

Green financing refers to funding projects, industries, businesses, or technologies that prioritise environmental sustainability. In Bangladesh, it encompasses initiatives such as solar power, biogas, hydropower, wind power, waste management and recycling, organic farming, and other renewable energy projects. At its core, green finance is any structured financial activity designed to promote better environmental outcomes. It includes loans, debt instruments, and investments aimed at developing eco-friendly projects or mitigating the environmental impact of traditional ventures. Sustainable finance, which closely aligns with green financing, focuses on conducting business in ways that reduce carbon emissions and environmental footprints. Together, these financing approaches are essential for fostering a greener and more sustainable economy. The sharp decline in green financing can largely be attributed to sluggish business expansion and reduced loan disbursements. Bankers have pointed out that the lack of new business ventures during this period has significantly impacted green and sustainable finance. The slowdown underscores broader economic challenges that are hindering the growth of environment-focused investments.

It may be noted that the central bank has been proactive in encouraging green financing since 2009. It introduced a revolving refinance scheme of Tk 2.0 billion to support products like solar energy, biogas, and effluent treatment plants. Over time, this fund was expanded to Tk 4.0 billion to meet rising demand. In 2016, the Green Transformation Fund (GTF), a long-term refinancing scheme of $200 million, was launched to support sustainable growth in the export-oriented textile and leather sectors. Later, 200 million Euros were added to the fund to strengthen the country's green economy. Despite these efforts, the recent downturn in green financing highlights the need for renewed focus and policy intervention.

The decline in green financing signals a dual challenge: banks face higher risks in disbursing loans, and there is an urgent need to stimulate demand for green projects. To address these issues, policymakers and stakeholders must collaborate to create a more favourable environment for green investments. Banks and FIs need risk-mitigation mechanisms to encourage lending in environmentally sustainable projects. Enhanced guarantees, government subsidies or insurance for green investments could help alleviate concerns about potential defaults.