The Financial Express

Promoting green finance to develop green economy

| Updated: June 26, 2018 20:25:27

Promoting green finance to develop green economy

Green economy has emerged as a strategic priority for many governments. It is an alternative to today's dominant economic model, which exacerbates inequalities, encourages waste, triggers resource scarcities, and generates widespread threats to the environment and human health.

According to UN Environment, an inclusive green economy is one that improves human well-being and builds social equity while reducing environmental risks and scarcities. In 2008, Un Environment launched the Green Economy Initiative (GEI), a programme of global research and country-level assistance designed to motivate policymakers to support environmental investments.

Financial sector supports economic growth of a country. So, proper readiness and sincere action from this sector can help Bangladesh develop a green economy.

The core purpose of the financial system is to serve the real economy by 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 favour of environment-friendly endeavours (i.e. enterprises that have a sustainable approach). Secondly, 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 least, it is essential to have a roadmap with strategies (short, mid- and long-term) of transforming the entire financial system in a sustainable manner.

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 commercial banks is used in relevant policymaking (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 development role of central banks in advancing financial inclusion and green finance. Bangladesh Bank (BB) 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 and liquid waste management. BB'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, BB'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 assemble, 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 BB and deserves to be earnestly implemented. This will help Bangladesh in branding itself as a source of green textile and leather export products.

While the steps taken by BB 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 favourable to consider that greening the stock market could be a new entry point to green finance.

The role of financial sector in confronting the challenges of climate change is 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 signalling 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, heady by the Bank of England's Governor, has established the Task Force on Climate-Related Risk Disclosure. The Bank of England (BOE) has also transformed insurance sector to integrate climate change in risk assessment.

Developing countries are adopting green finance strategies as 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 let's come 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 is essential. 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) and BB have to play their mediating role as relevant regulators. They can ensure proper incentives for the private actors. For example, a list of banks and financial institutions (FIs) having good green financing record can be published and they may be awarded better CAMELS rating accordingly.

BB ensured support for agriculture sector through subsidized credit for spices cultivator and cattle rearing households, and the same model may be followed for green entrepreneurs as well. About CSR support for green initiatives, currently 10 percent of CSR expense are going to green endeavor, this ratio should be raised to 25 percent. This will encourage small-scale entrepreneurs to innovate more in the field of green enterprises. We also need to emphasize on government or large power companies buying additional electricity from households that use off-grid solutions through net-metering. If this can be facilitated with necessary incentivisation, more households will be interested in using for themselves and sell it to the national grid.

We, in Bangladesh, have not yet been able to source adequately 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 had recently recognised  the Infrastructure Development Company Limited (IDCOL) as Bangladeshi accredited NIE (National Implementing Entities) which can access this fund. This is a good start indeed. Let's remain more focused on green financing. Here both the government and financial regulators, particularly Bangladesh Bank, can play strategic roles.

Dr. Atiur Rahman is an eminent economist and a former Governor of Bangladesh Bank.

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