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Green financing: Addressing environmental challenges and climate change

Published: Sunday, Jan 31, 2016


Posted : 31 Jan, 2016 00:00:00



Green financing: Addressing environmental challenges and climate change

Azmina Azad and Saeba Ruslana Abedin

Throughout the 20th century, the tendency to exert a negative influence on ecology has reached a high level, resulting in a rapid increase in environmental pollution, greenhouse gases (GHG) emissions in the atmosphere leading to global warming and climate change. Climate experts estimate that global temperatures have risen 0.7oC since 1900 which could go up to 2oC by 2050.In Bangladesh, this is expected to cause rising sea-level, salinity intrusion, adverse upstream developments like drought and flooding, and severe land degradation.

Combating climate change and environmental pollution are, without any doubt, issues that are at the front and centre of the global policy discourse, encapsulated in the COP21 declaration in Paris last December. They are intrinsically tied to politics, economics and other disciplines, making  them not only some of the most complex subject matters, but also issues that require the highest priority. By all accounts, Bangladesh remains one of the highly vulnerable nations to be affected by climate change and environmental pollution. There are specific sectors of Bangladesh that require intervention, namely, crops and fisheries, the textile and leather industry, brick manufacturing and exploration of renewable energy.

Keeping all these in mind, Bangladesh Bank (BB) has developed a Green Banking Policy in 2011.The Green Banking Policy is considered as one of the tools of ensuring sustainable development of the environment and securing the ecological system by minimising negative impacts of economic activities. Although the concept is relatively new, green banking is gaining momentum in Bangladesh at quite an impressive rate indicating a more effective and efficient use of resources in the future. The green financing component of banking is of particular interest.

GREEN FINANCING FACILITIES OFFERED BY BANGLADESH BANK: To promote green financing, BB has introduced three types of refinancing facility: BB Refinance Scheme, Asian Development Bank (ADB)-supported Refinance Scheme and Refinance Schemes funded by Shari'ah-based banks and financial institutions (FIs). The purpose of the refinancing schemes is to broaden the financing avenue for green products and to minimize the negative impacts of the economic activities. Currently, 45 banks and nine FIs have exposure to green finance and are required to meet the targets set by BB for direct green financing. From January 2016 onwards, the target will be 5.0% of the total loan disbursement of funded loan for all banks and FIs.

ALLOCATION OF GREEN FINANCE TO SPECIFIC SECTORS: RATIONALE AND DEVELOPMENTS: Environmental sustainability remains a challenge for Bangladesh. Energy production is still fundamentally dependent on non-renewable sources which are met with two drawbacks -- their rapid depletion and release of greenhouse gases into the atmosphere. To promote and foster the renewable energy development in Bangladesh, a dedicated Renewable Energy Policy was adopted in 2008. Ultimately, the reliance on renewable sources of energy will help contain emissions from exceeding the desired limit.

Contamination of soil and ground water through discharging of chemicals, deterioration of air quality through emissions by factories, brick kilns etc., are now becoming major concerns for the country. These are likely to have harmful effects on its agricultural products leading to long term effects on both health and well-being of the public.

Green financing: Addressing environmental challenges and climate change

Bricks are a fundamental construction material and the demand for bricks is soaring. The Department of Environment states that out of 6,886 kilns operating in the country, almost 45% of the kilns use older technologies which carry out huge amounts of carbon emissions and consume energy inefficiently. The government had formulated the Brick Making and Kiln Establishment (Control) Act 2013 which requires brick manufacturers to either shift to environmentally friendly technologies like Hybrid Hoffman Kilns, Zigzag and Tunnel kilns or relocate away from specific areas (e.g. residential and commercial areas, forests, agricultural lands etc) by July-August of the year, 2016.

The readymade garment (RMG) industry is the largest contributor to the exports of Bangladesh, comprising 80% of its total exports. A major environmental hazard present in textile industries is the discharge of untreated effluent to the environment, causing pollution of nearby soil and water. The leather and leather products industry is a promising export sector. The untreated toxic waste released every day from the Hazaribagh tanneries into the Buriganga River, are posing a serious threat to human and animal health. To mitigate the risks from the discharge of untreated water, effluent treatment plants (ETPs) are required. The Industrial Policy 2010 states that the government will take necessary measures for effective enforcement for proper running of ETPs and central effluent treatment plants (CETPs) in the industries.

Keeping this in mind, BB introduced a revolving refinance scheme for solar energy, biogas, and ETPs of Taka 200 crore in August 2009.

Significant progress has been made in the area of generating of renewable energy sources like solar power and bio-gas. Under the refinancing scheme of green banking, installation of solar panels can produce notable volumes of electricity with no further deterioration of the environment. In 2014, an amount of US$ 32.2 million (Table1) was utilised under the refinancing scheme of Solar Home System (SHS), benefiting thousands of families with the production capacity of more than 165,000 kilowatt-hour (kWh) a day. Around US$ 17.9 million was utilised in the same year for solar irrigation pumps. Such initiatives will facilitate financial sustainability required for installation of solar panels and will also allow consumption of solar energy in urban and rural areas for both household and business use. Bangladesh also has enormous potential for generating bio-mass electricity. In 2014, an amount of US$ 212.8 million (Table1) was utilised for biogas under the Refinance Scheme of BB in 2014.

BB Governor, Dr. Atiur Rahman, a strong advocate of renewable energy, believes biogas can provide a sustainable and environment friendly solution in reducing the demand-supply gap of energy in the country. The National Bank Ltd (NBL) is also offering loans for biogas projects in which priorities are given to areas that are not surrounded by gas networking. Trust Bank too plans to finance 5,000 biogas plants to boost green banking activities. Once the biogas plants are established, both rural and urban areas will benefit from meeting household requirements and commercial use though bio-gas production.

BB launched "Financing Brick Kiln Efficiency Improvement Project" with loans worth US$ 50 million provided by ADB for reducing greenhouse gas emissions. Upto September, 2015, USD 7.37 million was disbursed under this project.

Under the Green Banking Scheme, ETPs in 834 industrial units were installed as of June 2014. A total of three Export Processing Zones (EPZs) -- Dhaka EPZ, Chittagong EPZ and Comilla EPZ of Bangladesh Export Processing Zone Authority (BEPZA) -- have come under CETPs facilities.BB is set to create a $200 million fund called the 'Green Transformation Fund' to provide low-cost loans to textile and leather industries for switching to environment-friendly production.

As of now, there are 47 products under the refinancing scheme. Total investment under indirect green finance (projects with end of pipe effluent treatment) has been the highest amongst banks and FIs. Private commercial banks alone have allocated Taka 167,976 million in 2015 and utilised Taka 79,329.37 million of fund for the Green Financing in the quarter -- July-Sep 2015 (Table.2).

Green financing: Addressing environmental challenges and climate change

THE WAY FORWARD: Despite these developments, there are some issues that need to be addressed. Banks can only provide the funding but compliance and follow-up of fund utilisation needs to be done. The involvement of specific ministries, namely the Ministry of Environment, Ministry of Industries, Ministry of Land and Ministry of Water Resources, is extremely crucial in this regard. Though, Bangladesh has scope to produce renewable energy, it lacks adequate policy support and initiatives to do so. In order to build up a green economy, serious commitment is required from the concerned authorities. The green financing activities need to be aligned with the environmental policies and laws of the government.

The area of green financing is still a relatively new concept and needs to be explored extensively to generate significant benefits. In the future, areas of solid waste and liquid waste management of green financing which face under-investment, should be given priority as well. Specially, steps to clean the Buriganga river should be undertaken.

Out of all the FIs, private commercial banks disburse the highest amount of funds under green financing. Other banks should also be encouraged to increase their disbursements in order to generate significant benefits. Stakeholders, banks and FIs must work together to attain BB's targeted goals and the banks should be required to fully disclose and report their green financing activities.

Green financing initiatives of BB has been highly regarded as innovative approaches in central banking activities with the Governor receiving kudos from reputed financial publications abroad. Provided that the finance continues to be channelled in a transparent and environmentally friendly manner, Bangladesh can hope to overcome its environmental challenges and become one of the first green countries in the world.

This article was jointly prepared for FE-PRI EAU by Azmina Azad and Saeba Ruslana Abedin who are Senior Research Associates at Policy Research Institute (PRI). They can be reached at aazad@pri-bd.org and saeba.ruslana@gmail.com respectively.