From credit to climate action: The evolving role of banking sector in Bangladesh

As the world faces accelerating climate shocks, Bangladesh remains one of the most vulnerable countries to their impacts. From rising sea levels and cyclones to saltwater intrusion and erratic rainfall, climate change threatens lives, livelihoods, and economic growth across the nation. Yet amid these daunting realities, a financial force has quietly contributed to back the country's climate ambitions for long -- the banking sector.

In recent years, the banks in Bangladesh have taken on an increasingly pivotal role in driving climate mitigation financing, turning traditional banking into a vehicle for sustainability. Once confined to conventional lending, banks are now helping to build a low-carbon and climate-resilient economy.

Financing the Green Transition

Bangladesh's climate roadmap is anchored in its Nationally Determined Contributions (NDCs) under the Paris Agreement. The country has pledged to reduce greenhouse gas emissions by 6.4 per cent unconditionally and by 13.9 per cent conditionally by 2035 compared to business-as-usual levels in the recently submitted NDC 3.0, provided that adequate financial and technical assistance is secured.

Reaching these targets will require substantial investment worth around USD 46.38 billion under the unconditional scenario and USD 270.13 billion if external financing can be secured.

Complementing the NDCs, the government has adopted the Bangladesh Climate Change Strategy and Action Plan (BCCSAP), which prioritises renewable energy, sustainable transport, disaster management, and biodiversity protection. Together, these frameworks chart a clear course for Bangladesh's green transition, yet the core challenge persists-a substantial funding gap. While international climate funds such as the Green Climate Fund (GCF) and Global Environment Facility (GEF) have extended support, Bangladesh cannot depend solely on foreign aid. Domestic capital mobilisation is critical, and this is where the pressing question remains: who will shoulder the responsibility of financing Bangladesh's climate transition from within?

Banking on Climate Action

The answer, increasingly, lies within the domestic financial system. Between 2021 and 2024, all the banks in Bangladesh collectively disbursed more than BDT 700 billion (70,000 crore) in climate mitigation financing which is a remarkable feat from the private sector.

The central bank's Sustainable Finance Policy, launched in 2023, has been a turning point. It requires banks and financial institutions to integrate environmental, social, and governance (ESG) considerations into their lending decisions. This policy encourages institutions to go beyond compliance and actively promote sustainability through green lending, renewable energy projects, and environmentally responsible investments.

Thus, banks are no longer merely moneylenders but are increasingly becoming partners in Bangladesh's climate journey, aligning their portfolios with the Sustainable Development Goals and the Paris climate agenda.

Why the Banking Sector Matters

So, why is the banking sector positioned to lead in this climate transition? This is because it holds the following unique structural advantages that naturally place it at the forefront of climate finance.

1. Access to Capital: Banks command a significant share of national savings and credit. As intermediaries between depositors and borrowers, they can mobilise vast pools of domestic capital and channel them towards low-carbon investments.

2. Expertise in Risk Management: Climate change introduces new layers of financial risk-from physical damages to transition risks as industries shift towards greener practices. Banks are equipped with the tools to evaluate, manage, and price these risks effectively, while helping businesses adapt to emerging environmental standards.

3. Policy Alignment: Bangladesh Bank's policy framework now actively promotes sustainability. Banks are incentivised to finance renewable energy, energy efficiency, green buildings, and sustainable agriculture. This alignment has helped mainstream green finance within the formal financial system.

4. Innovation and Financial Products: New products such as concessional green loans, climate risk insurance, and sustainable investment funds are increasingly being introduced. Moreover, the rise of sustainability-linked bonds is helping attract institutional and retail investors looking to support environmentally responsible ventures.

5. Mobilising the Private Sector: The private sector represents the largest untapped source of climate finance. Banks act as the bridge between investors and climate-smart projects, enabling sustainable ventures that might otherwise lack funding. Through public-private partnerships (PPPs) and collaborations with international agencies, banks can de-risk investments and make green projects financially viable.

Closing the Financing Gaps

However, despite promising progress, several challenges must be addressed for the banking sector to fully unleash its potential in climate finance.

1. Strengthening the Regulatory Framework: While the Sustainable Finance Policy has laid a solid foundation, more incentives are needed to scale up investment. Tax rebates for green investments, clear guidelines for issuing green and sustainability-linked bonds, and simplified approval and underwriting mechanisms to access international climate funds can significantly expand green financing portfolios.

2. Building Institutional Capacity: Financing climate projects requires specialised knowledge of environmental risks, renewable technologies, and carbon markets. Banks need dedicated teams trained in assessing and managing both physical and transition risks. Embedding ESG criteria into credit assessments will also ensure that financing decisions align with national sustainability priorities.

3. Enhancing Transparency and Accountability: Global standards now call for banks to disclose their climate-related risks along with their carbon exposure. Adopting robust reporting frameworks aligned with international best practices and third-party verification will improve governance and prevent greenwashing. This transparency will also attract international investors seeking credible, impact-oriented portfolios.

5. Raising Awareness and Market Demand: Beyond banks and their supply dynamics, there is a need to cultivate awareness among businesses and consumers about the economic value of sustainability. This will ensure a rise in demand for green products and the market will naturally shift towards low-carbon solutions.

A Green Engine for Sustainable Growth

Lastly, Bangladesh's financial sector stands at a critical juncture. Climate change is not only an environmental challenge but also an economic and financial one. Banks that once viewed climate action as philanthropy are now recognising it as smart economics-an investment in resilience, competitiveness, and long-term stability.

Through strategic policy alignment, innovation, and risk management, banks can unlock billions in private capital to accelerate Bangladesh's green transition. The sector's growing commitment demonstrates that sustainable finance is no longer an abstract ideal but an operational reality.

In a country where climate change threatens to roll back decades of development gains, the role of financial institutions is nothing short of transformative. As Bangladesh strives to meet its 2035 emission targets and pursue sustainable growth, the banking industry's contribution could determine how successfully the nation adapts and thrives in a warming world.

With the right mix of government incentives, international cooperation, and sustained private engagement, banks can become the financial engine powering Bangladesh's fight against climate change -- ensuring a future that is not only prosperous but also planet-friendly.

The writer is working as SAVP and Senior Manager, Sustainable Finance at City Bank PLC. gultekin060992@hotmail.com