Scaling up sustainable finance is the key to accelerating green growth

Illustration: TBS

It is well recognised that green growth is suggested to be a balanced approach to achieving sustainable development - protecting the environment while ensuring economic growth. 

Green growth broadly targets environmental sustainability by reducing pollution and lowering greenhouse gas emissions; economic resilience by promoting clean and sustainable technologies and practices; health and well-being by reducing pollution and improving air and water quality; energy sustainability by investing in renewable energy and energy efficiency; sustainable agriculture by enhancing food security and reducing the environmental impact of farming; sustainable infrastructure by promoting environmentally friendly public transportation and energy-efficient infrastructure; and global cooperation by adopting green growth principles and aligning with international efforts to address climate change and environmental degradation.

Sustainable finance plays a crucial role in promoting green growth by channelling financial resources towards environmentally friendly and socially responsible projects and initiatives. There are several ways in which sustainable finance contributes to green growth. 

Sustainable finance helps integrate environmental, social, and governance (ESG) criteria into investment decision-making. Financing sustainable agriculture practices can enhance food security and reduce the environmental impact of farming, and investments in organic farming and agroforestry can contribute to green growth.

Sustainable financing activities are also directly associated with climate adaptation, energy sustainability, the circular economy, sustainable infrastructure, and green technology innovation. It is also important to note that sustainable finance can help reduce long-term financial risks associated with climate change and environmental degradation by investing in the mitigation of potential future costs related to environmental damage.

An economy needs realistic, sustainable finance instruments to achieve expected outcomes. Sustainable finance instruments are financial tools and mechanisms designed to promote sustainable and responsible business practices and investments that support the transition to a more sustainable and low-carbon economy. In facilitating these instruments, banking and financial institutions and capital market entities have significant roles to play in promoting green growth by channelling financial resources towards environmentally sustainable projects, businesses, and initiatives.

Green loans and bonds are gaining popularity among sustainable financial instruments. Green loans, offered by banks and financial institutions, are loans provided to finance environmentally friendly projects or investments. They offer borrowers more flexibility than bonds and can be used for a variety of green purposes. 'Green trade loans,' 'green guarantees,' 'green letters of credit,' and 'green supply chain finance' are some recently developed innovative green loans to support sustainable initiatives. Similar to green loans, social loans are designed to fund projects with positive social impacts that may be used for initiatives like community development, affordable housing, or education. 

'Sustainability-linked loans' have interest rates linked to specific sustainability performance targets or key performance indicators. If the borrower meets the predefined sustainability goals, they may receive a discount on their interest rate.

Green and sustainable financing activities by banks have basically been regulatory-driven. We have a bank-based financial system, and to date, we have identified and implemented certain green or sustainable loans that are offered by banks and financial institutions. 

Despite several notable challenges, some success stories are inspiring. Some banks have also introduced 'green deposits' that offer opportunities to invest short-term liquidity into environmentally sustainable projects, with companies required to meet certain eligibility criteria to qualify for green deposits. Sustainable deposits are used to fund small and medium-sized enterprises in some developing countries. Banks and financial institutions in Bangladesh have yet to introduce these deposit products.

'Green bonds' are growing at a faster pace in many global economies. These are debt securities issued to fund environmentally friendly projects or initiatives. The proceeds from these bonds are earmarked for specific green projects, such as renewable energy infrastructure, energy-efficient buildings, or clean transportation. 'Sustainability bonds' are a combination of green and social bonds. They finance projects that have both environmental and social benefits. 

The proceeds can be used for a broader range of sustainable initiatives. 'Blue bonds' are associated with marine and aquatic ecosystems. Blue bonds are used to finance projects that focus on areas such as marine biodiversity preservation, sustainable fishing practices, and ocean conservation.

Despite improvement, the capital and bond markets of Bangladesh are confronting several fundamental challenges. The introduction of green bonds in the country's market is an inspiring initiative. However, notable efforts are needed for the improvement of the basic capital market and the consolidation of the green bond market.

Several stakeholders play a crucial role in shaping the direction and impact of sustainable finance initiatives. These stakeholders in sustainable finance are individuals, organisations, or groups that have a collective interest in promoting and participating in financial activities that align with ESG criteria or sustainable development goals (SDGs). 

Effective collaboration among these stakeholders is essential for advancing the goals of sustainable finance and promoting green growth. Government agencies and regulatory bodies set the legal and policy framework for sustainable finance and also introduce incentives, regulations, and standards to promote sustainable investment and ensure transparency in reporting ESG factors. 

Banks and financial institutions are important stakeholders in sustainable finance because they offer financial products and services that allow investors to allocate capital towards sustainable projects. Institutional investors, as well as individual investors, are crucial stakeholders, and their investment decisions can influence the allocation of capital towards sustainable projects. 

Moreover, trade associations, communities and local governments, civil society organisations, media, and academic and research organisations have crucial roles to play. International organisations and donors are also very active in promoting sustainable financing activities.

The policy and planning documents of Bangladesh recognise the necessity and implications of green and sustainable growth, where sustainable banking and finance activities are directly associated. The country is committed to attaining SDG goals, and sustainable growth policies are aligned with the Paris Agreement (adopted in COP21), which is reflected in Bangladesh's Nationally Determined Contribution (NDC) roadmap and associated action plan. The Eight Five-Year Plan (2020-2025) and Perspective Plan (2021-41) are instrumental in attaining the government's goal of green growth.

Bangladesh Bank (BB) is shouldering the key responsibility of taking care of sustainable financing. Introducing the 'Sustainable Finance Policy' appeared to be a notable intervention. The central bank has adopted several refinancing schemes and supportive policy approaches, and banks and financial institutions are responding to the policy initiatives. The green bond market in Bangladesh is making its debut and is governed by the Bangladesh Securities and Exchange Commission (BSEC).

A lot needs to be achieved in the country on the sustainable finance front to attain the goal of green growth. The future roles and interventions of the BB and BSEC and their coordinated approach would be crucial in shaping the sustainable finance market in Bangladesh. Very importantly, the financial sector needs strong policy support from government agencies to create the right kind of incentive and supportive framework for the agents of change in green growth through sustainable finance.

Dr Shah Md Ahsan Habib is a Professor at Bangladesh Institute of Bank Management (BIBM).

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.