The whole world, including Bangladesh, is now facing a Double Whammy of climate change and pandemic. The second wave of the coronavirus infection has been affecting deeply both lives and livelihoods making the hope of early recovery from this unprecedented crisis quite uncertain. Given these multi-pronged challenges, it is not surprising that the policymakers of Bangladesh will be making concerted efforts to bring the global leaders on the same platform to work for a green recovery from both crises. In fact, Bangladesh Prime Minister anticipated this dangerous outlook and wrote in September last year that, “Climate change, pandemics, and destruction of nature are common threats. They should unite us in working towards a common solution: a cleaner, greener and safer world.” (The Financial Times, September 28, 2020).
Green Recovery from the pandemic must also be the starting point for addressing the challenges of climate change. It has been noticed that the ongoing pandemic has been more disastrous in the densely populated, highly polluted, and unplanned ugly urbanized cities than anywhere else. With this reality in mind, I believe the upcoming COP26 or the global climate conference in November this year in Glasgow, Scotland; will be the right forum to push the agenda for aligning global efforts for addressing both crises. In particular, the pressing climate change issues, including Loss and Damage, must get the priority in this global meet. Bangladesh Prime Minister Sheikh Hasina, who is also the leader of the Climate Vulnerable Forum of 48 vulnerable countries, will certainly be raising the relevant issues of climate vulnerabilities with her counterparts of the developed countries in this forum.
We are aware of the moral consensus that the global leaders reached for higher international cooperation for addressing the climate change challenges at the Paris Climate Agreement in 2015 and as well as for realizing SDGs in New York in the same year. Moreover, there was an agreement among the leaders that necessary capital would be mobilized for the inclusion of the underserved and for sustainable infrastructures and innovations. As a follow-up of this moral compass, the agenda of sustainability deserves to be mainstreamed, ensuring that ESG (Environmental, Social, and Governance) factors are integrated into risk management in addition to elaborate disclosures. And, here comes the strategic role of the central bank in promoting sustainable finance.
“Central banks as regulators have tools with which to address climate change. Monetary policy has implications for issues beyond inflation and payments, including climate change and inequality. The best way forward for central bankers is to use monetary policy to target inflation while directing their regulatory powers at other pressing concerns.” – Barry Eichengreen (Professor of Economics, University of California, Berkeley, ‘New Model Central Banks’, Project Syndicate, 09 February 2021).
The momentum for sustainable finance was, indeed, building up with so many private sectors coming forward with sustainable financing commitments following the Paris Climate Agreement. This was suddenly disrupted when the pandemic began to raise its ugly head. However, despite this setback, there is an imperative for aligning the financial systems with the financing needs of the inclusive and sustainable economy. Planning for long-term investment in both large and small projects with the support of the corporates who can mobilize capital and transfer risk is at the core of this green transition of the global economy.
Bangladesh has done quite well in reorienting the banks towards inclusive and sustainable finance in addition to their widespread digitization, which itself is a greening exercise. It has also been creating fiscal space for green investment by first creating a Climate Change Trust Fund and then providing nearly 8 percent of the annual budget for climate adaptation in various sectors. However, more interesting has been the proactive green financing strategy pursued by Bangladesh Bank, the Central Bank of the country, right from 2009 when the whole world was deep into the global financial crisis.
Bangladesh Bank as a pioneer of sustainable financing, not only created long term green transformation fund for energy efficiency in the textile and leather sectors but also provided refinance to the financial institution to support small and medium enterprises to go green with about fifty green products. It also gave a sustainable finance taxonomy in addition to ESG risk management guidelines to the financial institutions for becoming proactive towards the green transformation of finance. The central bank also provided recognition to those financial institutions that went for funding green products. They also get a better CAMELS rating from the regulator, which enhanced their reputational incentives to go green. In other words, besides targeting inflation, the central bank of Bangladesh has been using creative regulatory tools to address climate change and other pressing concerns. Though slow, the financial sector has been quietly changing its mindset towards green transition.
Capital Markets can also provide a critical channel to enable long-term debts or equity-backed securities to be sold to institutional investors. As we all know, the capital market channels household savings towards building the productive capacities of the economy in better ways than banks and financial institutions do. First, the capital market eliminates the need for intermediation by banks and financial institutions. As a result, the savers can enjoy the entire return their savings generate. Better returns motivate them to save more and, as a result, more investments happen. Second, compared to banks and financial institutions, the capital market enables long-term investments better as instruments such as bonds and stocks are long-term in nature. As the investors in capital market instruments can sell the instruments in the market at any time, they buy them without worrying too much about their long-term nature.
Globally, there has been a lot of initiatives in recent years to incorporate ESG considerations in financing decisions. Many of the leading global asset managers who manage tens of trillions of dollars have committed to uphold ESG principles. Commitment to the environment is particularly important for Bangladesh, which is a low-lying delta facing the worst kind of climate challenges. We, therefore, need to take leadership in taking into ESG considerations in financing for our own existence.
To ensure proper finance for green recovery, the measures to be delivered must include:
- Reallocation of resources in favor of green enterprises.
- Management of environmental, social, and governance risks.
- Considering environmental and social concerns as proper components of the fiduciary’s analysis.
- Reporting and disclosure of risks to enable informed decision-making.
- Having a roadmap with strategies to transform sustainably.
For the desired green recovery, Bangladesh must:
- Prioritize green growth in the recovery process through allocating a share of stimulus for green enterprises (including term loans for new green initiatives)
- Map areas of green investment, for example- green infrastructure, net metering, waste management, etc.
- Learn from previous green initiatives (Bangladesh Bank, IDCOL, SREDA, etc.) and scale up and/or replicate
- Provide fiscal incentives to further encourage investors to Go Green
The capital market has also been going through necessary reforms and transformations towards green financing. Recently, BSEC has approved a billion Taka green bond for Sajida Foundation for funding its microfinance activities. The Standard Charted Bank, along with an Insurance Company, partnered with Sajida Foundation to launch this maiden green bond in Bangladesh. And it seems there is a huge appetite for green bonds/sukuks for changing the real economy towards green transformation. It is high time that all the regulators come together and cooperate in accelerating this green transition. The fiscal authority also has a crucial role to play in incentivizing this transition with its innovative tax and tariff facilities.
Dr. Atiur Rahman
The author is Bangabandhu Chair Professor, Dhaka University
Former Governor, Bangladesh Bank.
He can be reached at [email protected]