Transitioning towards an inevitable future

With development of green financing growing across the globe, Bangladesh has become an important country for consideration due to its vulnerability to climate change.

Recent economic prosperity has accelerated industrialisation and mega project development at the expense of environmental degradation.

According to a World Bank report, 5.3 million people in the country will be vulnerable to the effects of climate change by 2050.

The UNFCCC estimates that Bangladesh will suffer an annual loss of 2% to 9.4% of GDP between 2050 and 2100 if the situation remains unchanged.

The frequency and intensity of extreme weather can damage factories, supply chain operations and their infrastructure, while droughts raise the cost of water, affecting the cost of raw materials and production. 

With such climate risks, the need for long-term green financing has become a critical collective agenda.

Green finance refers to a set of institutional arrangements that use financial services such as lending, private equity bonds, shares, and insurance to attract private capital investments into green practices such as energy conservation, environmental protection, and clean energy.

Countries like Brazil, China, and Lebanon offer excellent examples of incentives towards green finance.

For instance, China imposed credit restrictions on companies based on their environmental compliances, whereas Brazil and Lebanon have made it so that banks with larger share of green projects in their loan portfolio are required to hold less reserves. 

To their credit, Bangladesh's banking sector adopted early moves to begin this process. Bangladesh Bank introduced Environmental Risk Management (ERM) in 2011.

In 2017, ERM's guidelines were updated to incorporate risk mitigation measures and environmental risks in overall credit management.

The central bank also launched the Green Transformation Fund in 2016, a $200 million refinancing scheme sourced from the bank's fund for export-oriented sectors like the jute, textile, and leather industries.

Bangladesh has also mandated that commercial banks devote at least 5% of their lending to renewable energy and other green technologies during this period.

Another significant development was the launch of the Mujib Climate Prosperity Plan which aims to acquire 30% of the country's energy from renewable sources by 2030.

By mobilising international financing, this recent proposal aims to foster sustainable economic growth and energy security. 

Despite the existing policies, there is always room for improvement. The country is ranked 162nd out of 180 countries in the Environmental Performance Index and green banking only constitutes 1.6% of the banking industry in Bangladesh, compared to the standard 7% for other emerging economies.

Bangladesh's weaker institutional environment creates additional challenges for the private sector and as a result, the initiative has yet to gain traction in proportion to the country's economy and other international countries.

Policymakers can improve this by incentivising green assets through tax reliefs and import subsidies for green technologies. This will increase its demand, instead of it being perceived as a 'nice-to-have' by local entrepreneurs.

Aside from enforcing preferential treatment, coordination and information-sharing between environmental regulatory bodies and government administrative departments can be improved, as can the practice of green finance across government. 

Due to the distant, intangible, and unpredictable nature of climate change, most stakeholders tend to ignore the long-term implications of environmental risk.

It is, however, inevitable. It is critical for financial market development to be accompanied with sustainable development.

By utilising sustainable financing, Bangladesh can increase their resilience to climate risks and vulnerabilities, promote sustainable economic growth, and improve the public health of its citizens.

Ahnaf Shahriar is the Founder and CEO at Flagship Ventures, a venture capital firm in Bangladesh. He is a graduate at the University of Toronto

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.