The Impact of Green Finance in Bangladesh Charting a Greener Future

Bangladesh has been profoundly affected by global human-induced climate change, despite its minimal contribution to the problem. The consequences are stark, with the country experiencing frequent cyclones, tornadoes, floods, coastal and riverbank erosion, droughts, landslides, heat waves, and prolonged summer seasons. According to the Global Climate Risk Index 2021, Bangladesh is ranked as the seventh most disaster-prone country in the world, underscoring its extreme vulnerability to both natural disasters and climate change.

In response to this existential environmental crisis, the banking sector has taken proactive measures by offering green finance loans, refinancing options, and dedicated funds aimed at mitigating the devastating effects of climate change and promoting a sustainable future for Bangladesh.

According to the central bank's latest report, the total amount of green finance disbursed during FY23 was BDT 126.41 billion by banks and BDT 23.58 billion by NBFIs. Green finance accounted for 5.84 percent of the total term loan disbursements.

"We are pioneers in green financing, an initiative started by the central bank in 2009-2010. The United Nation Environment Program (UNEP) recognized Bangladesh Bank as the first central bank to implement green finance, and now other central banks have followed suit. We created an initial green fund with Bangladesh Taka 2000 million for refinancing small and medium enterprises with only three products," shares Professor Atiur Rahman, former governor of Bangladesh Bank. The number now stands at 94 as we diversified the sustainable finance program. We now have an elaborate Sustainable Finance Program at the central bank which earmarks a minimum of 20% of term loan as sustainable finance. The program also provides sustainable rating to banks and announces ten best performing banks annually.

He also elaborated on the context of why the green fund for small and medium enterprises was expanded to include heavy industries, such as the garment sector, noting that Bangladesh has been globally recognized for its RMG products.

 "After the Rana Plaza incident, we secured a three million dollar fund from the World Bank and another three hundred million dollars from Bangladesh Bank, which continue to support the green transformation fund. We added another two hundred million dollars or so from our own kitty. The results have been fantastic, with over 200 plus LEED certified platinum and gold rated green factories established and another 500 are in the pipeline. Out of the 20 best platinum rated green factories in the world, 18 are now in Bangladesh," adds Atiur Rahman.

According to the central bank's latest report, the total amount of green finance disbursed during FY23 was BDT 126.41 billion by banks and BDT 23.58 billion by NBFIs. Green finance accounted for 5.84 percent of the total term loan disbursements.

The central bank has made Environmental and Social Risk Rating (ESRR) mandatory for banks and NBFIs, under ESRM guidelines. During FY23, 229,592 projects were rated using the Environmental and Social Due Diligence (ESDD) checklist. A total of BDT 4,165 billion was disbursed across 179,022 rated projects in FY23. Additionally, a total of BDT 0.88 billion was utilized from the climate risk fund by banks and NBFIs in FY23, provided as grants.

The green banking policy has encouraged banks to establish online branches and power them with solar energy. By the end of FY23, there were 720 branches powered by solar energy. Moreover, the sustainability rating methodology for banks and NBFIs, circulated on December 31, 2021, includes green refinance as one of its five components. This rating assesses the performance of banks and NBFIs in terms of their sustainability practices.

In 2009, a revolving refinance scheme worth BDT 2.0 billion was instituted to offer accessible financing for green products and initiatives. This fund was later augmented to BDT 4.0 billion. Initially, the scheme identified six green products or initiatives for the refinance facility. By FY22, the number of eligible green products and initiatives for refinance had risen to 68.

The central bank's latest initiative to promote sustainable finance is the establishment of the Green Transformation Fund (GTF). Initially targeted at the export-oriented textile, leather, and jute sectors, it was later expanded to encompass all export-oriented industries, facilitating sustainable export growth as the nation transitions to a greener economy. As per the Bangladesh Bank report, disbursements from the Green Transformation Fund (GTF) totaled USD 140.94 million across 47 projects and Euro 71.21 million across 30 projects by FY22. Furthermore, by June 30, 2023, BDT 1778 million had been disbursed to five clients of four banks from the local currency GTF fund.

Bankers opine that if projects are carefully selected, green finance loans are unlikely to turn into bad debts over time. Consequently, they foresee significant potential for green finance.

"In 2023 alone, EBL financed BDT 1,180 crore across 385 diverse projects dedicated to promoting energy and resource efficiency, effective liquid waste management, circular economy ventures, LEED certified factories, green CMSMEs, information and communication technology projects, and more," shares Ali Reza Iftekhar, Managing Director, Eastern Bank PLC.

"BRAC Bank has been recognized as one of the top sustainable banks in Bangladesh for the past three consecutive years. We continuously emphasize green and sustainable financing, increasing the percentage of such financing each year. In the last quarter, we disbursed BDT 15,472 million in green financing, constituting 23% of our total term loan disbursements," says Md. Sabbir Hossain, DMD & Chief Sustainability Officer, BRAC Bank PLC.

"In 2023, Prime Bank disbursed BDT 784.82 crore for green finance initiatives. This amount is 19.95 percent of the total term loan disbursement, apart from the staff loan. Our green finance portfolio is concentrated mainly on energy and resource-efficient machinery of RMGs and establishments of green buildings for RMG factories," shares Md. Ziaur Rahman, DMD and CAMLCO & Chief Risk Officer, Prime Bank PLC.

"Our bank consistently prioritizes green finance. As a result, we were among the top 10 award recipients from the Central Bank for sustainable finance in 2020 and 2021. Last year, we disbursed loans to approximately 100,000 borrowers across all loan segments with a particular focus on small clients, totaling BDT 53170.77 million only for sustainable finance, including BDT 182 million in green finance. Moving forward, we aim to provide loans for renewable energy, solar projects, environmentally-friendly buildings, and energy-efficient equipment for manufacturing," states Shafiuzzaman, AMD & Chief Credit Officer at Bank Asia PLC.

When asked about whether the existing level of green finance is adequate to tackle Bangladesh's urgent climate and environmental issues, Atiur Rahman points out that the current financial crisis has somewhat slowed the flow of green investment. However, the entrepreneurs are coming forward with their own equities as this adds to the value in green branding of their products that have higher consumer demands. Yet, he remains optimistic that once the financial situation stabilizes, there will be a resurgence of initiatives from the central bank aimed at bolstering this crucial sector. In the meantime, the sustainable finance will get more support from the international development partners, he hopes.