Sustainable Finance To Foster Green Growth11 October 2021
Barrister Shehrin Salam Oishee :
Bangladesh's RMG industry is increasingly prioritizing the issue of sustainability. Our industry's leaders recognize that sustainable production is essential in order to attract and retain international fashion brands and retailers - most of which now have firm targets set for the reduction of carbon emissions. To achieve these carbon reduction goals, the fashion industry is inherently dependent on its supply chain. Cleaner production, increasing use of renewable energy and the implementation of smart technologies are among watchwords of our RMG industry as it strives to become the 'go-to' sourcing hubs for progressive apparel brands.
All of the above requires investment, however, and to this end, we are seeing a huge growth in sustainable or 'green' financing/green funds as well as the increased use of environmental, social and corporate governance (ESG) criteria to evaluable investments and their social impacts.
Green finance is a structured financial activity which has been developed to ensure a more desirable environmental outcome. Examples of green finance include an array of loans, debt mechanisms and investments used to encourage the development of green projects or reduce the impact on the climate of more regular projects.
Globally, the green bond market could be worth $2.36 trillion by 2023 and is regarded as a way of meeting the needs of environmentalism and capitalism at the same time.
Green Finance in Bangladesh
To become a leader in sustainable apparel production, Bangladesh needs to simultaneously adopt and embrace green finance mechanisms. This is a relatively new market and Bangladesh is still playing catch-up.
At present, domestic banks and financial institutions have made a certain amount dedicated to green projects. Bangladesh has also taken several steps to encourage green financing, starting from establishing green banking policy guidelines, concessional refinancing schemes, and so on.
Alongside this, there is a limited amount of green equity finance as well, and currently approximately 15 venture capital firms are working on green projects. Such projects in Bangladesh are actively attracting the attention of both local and foreign investors, which includes DEFTA Partners and a number of Nordic companies amongst others, intending to invest in sustainable energy and clean-energy related projects in the country.
This all bodes well.
However, we still have work to do. Despite the green banking policy guidelines, there is a very slow promotion of such sustainable projects, due to a lack of a proper management and active interest of banks and financial institutions to manage such funds.
In Bangladesh, approximately 50 sectors were identified as eligible to receive direct green finance, up until 2017.
The majority of applications for green finance funding are made by small scale local entrepreneurs on the one hand, and the apparel and textile sector on the other, which - as indicated earlier - needs more green finance to help drive the shift to sustainable production.
A major barrier to our businesses in attracting green funding is proving creditworthiness in the form of equity or liability. This is hindered by the lack of proper documents and/or the insufficient fulfillment of the non-exhaustive list of requirements. Furthermore, the implementation of sustainable projects requires high transaction costs which often tend to over-shadow their benefits.
With such projects requiring new enhanced technology, this can generate considerable risk and uncertainty, alongside existing operational and market risks. These projects rely on the current guidelines of Bangladesh Bank and are highly vulnerable to policy changes, even causing complete loss upon minor policy changes.
For all the above reasons - and several others - despite the guideline of a minimum of 5% loan portfolio for green projects, Banks and financial institutions don't have enough favourable proposals to provide the same.
Bangladesh Bank instructed banks and other financial institutions to allocate at least 10% of their annual CSR budget to the Climate Risk Fund, either by providing direct grants or by providing finance at a reduced rate of interest.
The Bangladesh government has established two flagship green funds, namely the Bangladesh Climate Change Trust Fund (BCCTF) and the Bangladesh Climate Change Resilience Fund (BCCRF). These have been created with the aim of funding green projects and reducing the development time for such projects.
Bangladesh has also received total grants worth US$143.59 million to implement 41 projects from the Global Environment Facility (GEF), which was established in 1991.
The World Bank set up a Climate Investment Fund (CIF) in 2008 with funding from 14 developed nations, the UK being the leader. This is composed of 4 programmes, of which Bangladesh accesses funds from 3: the Pilot Program for Climate Resilience, the Scaling Up Renewable Energy in Low Income Countries Program, and the Forest Investment Program.
In addition, the World Bank instructed banks and FIs to provide financing for solid waste management systems, rainwater harvesting plants, and solar power panel projects.
(Barrister Shehrin Salam Oishee is a Director of Bangladesh Garment Manufacturers and Exporters Association (BGMEA), Director of Envoy Group and an Advocate of the Supreme Court of Bangladesh).
----- To Be Continued ---