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The Financial Express

Uplifting the market for sustainable finance in Bangladesh -- a primer

| Updated: March 24, 2022 21:32:36


Uplifting the market for sustainable finance in Bangladesh -- a primer

The realm of sustainability-driven investing has induced a growing magnitude of market participants in recent times with Moody's forecasts indicating that sustainable bond issuance will hit a record in 2021 not to mention a finding from HSBC's Sustainable Financing and Investing Survey 2020 indicating that approximately 90 per cent of issuers and investors perceive sustainable finance as 'important' or 'very important'. Albeit being at a nascent stage, Bangladesh too is making some headway in its quest to transform its sustainable finance ambitions into reality. Here are a few suggestions this developing nation in its commitment towards achieving its sustainability objectives can adopt in order to experience a growth in its market for sustainable finance.

The country's second Sustainability Linked Loan worth BDT 250 Crore was structured by HSBC Bangladesh in a bid to support Bangladesh Steel Re-Rolling Mills Ltd (BSRM) in meeting their sustainability agenda. Sustainability Linked Loans are designed to foster environmentally and socially sustainable economic endeavours by attaching a borrower's cost of capital with an array of agreed performance metrics which can be any activity aligned with the 17 sustainable development goals set by the United Nations to be achieved by 2030 to protect the planet, end poverty and ensure peace and prosperity. We need to see a substantial increase in projects of similar or even greater scales to exemplify the transmission of sustainable finance into the mainstream of capital markets in this economy as these can be manifestations that sustainable financing is capable of offering realised outperformance at levels through which they can mirror any rational investment discipline.

The new generation of investment leaders or finance professionals have integral contributions to make in enhancing the flow of sustainable finance through capital markets. We should not only encourage but also effectively prepare them to participate in platforms such as Kellogg-Morgan Stanley Sustainable Investing Challenge which gives graduates across the globe opportunities to propose innovative financing/investing solutions which takes into account critical environmental, social and governance problems while aiming to offer competitive market returns to private-sector investors. From last year's finalists, a pitch which I thought was highly applicable in the context of our economy was the idea of a debt fund addressing gaps in the funding of sustainable infrastructure projects in developing countries while offering a first-loss hedge to enhance projects' credit profiles for institutional investors. Local universities as well corporations can arrange competitions of similar templates to unlock the potential of young enthusiastic minds in terms of fostering growth in sustainable investing.

A crucial factor likely to serve as a strong tailwind to the market growth of sustainability finance is improved disclosure through post-issuance reporting which largely depends on the publication of updated information on the performance of Key Performance Indicators (KPI) by issuers, authentication checks indicating the performance against the Sustainability Performance Targets (SPTs) and any information which facilitates the monitoring process for investors. Failure on the part of issuers to illustrate performance dynamics in line with SPT benchmarks in a timely and exhaustive manner is likely to be perceived unfavourably by bondholders. In order to set high benchmarks for disclosure, both an increase in the frequency of publication (at least on a yearly basis) and quality of reporting (generating information that is understandable and verifiable) needs to be achieved.

As a research report by Goldman Sachs suggests, we need to completely embrace the long term nature of sustainable finance and hence try to evaluate its practical implications whatsoever they may be while synchronising those realities with acceptable levels of performance. This can be heralded by shifting focus away from shorter term factors that spur immediate returns typical of majority of equity strategies and rather emphasising perspectives that embedding patience into the investing process can be rewarding. This is where banks and financial institutions can yield their influence through concerted efforts to not only enlighten investors about allocating assets towards such a style of investing but also adjusting their data driven mechanisms to make room for metrics that accurately reflect the explanatory power of long run factors which capture the quintessential dynamics of sustainable financing. Moreover, providing advisory services specifically tailored to the structural and functional nature of sustainable finance could also steer investor appetite towards this arena.

Policy support should serve as one of the principal engines in channeling momentum towards the markets which are likely to witness surging demand for sustainable finance. Sustainable Finance Policy for Banks and Financial Institution by Bangladesh Bank Sustainable Policy Department articulates a sound structure which not only highlights a plethora of sectors in which capital can be mobilised as sustainable finance but also various facilities such as the Bangladesh Bank Green Transformation Fund (GTF) Refinance Scheme of USD 200 million available to export driven industries to import green machineries. I believe this policy framework offers fertile ground for the accelerated growth of this market by creating plenty of opportunities for businesses to incorporate sustainable finance into their investment expenditures which can be achieved by implementing marketing strategies directed towards enhancing awareness of projects which make great utilisation of the policy framework.

Sustainable finance should be the way forward in our quest to effectively address concerns related to environmental management which is integral to prevent our economy from becoming susceptible to climate change. Hopefully in the long run this will set in motion an increase in activities to broaden the scope and capabilities of such type of finance into the wider economy.

 

Mehnaz Tabassum Khaleel is a graduate with MSc Finance and Investment from University of Nottingham, UK, currently working as an analyst for Alliance Capital Asset Management Limited.

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