The world is experiencing the ‘heat’ of climate change. And Bangladesh is at the frontline. According to the World Bank in 2022, Bangladesh could witness a staggering 13 million climate migrants by 2050. This means Bangladesh will be the most ‘climate migration’-vulnerable country in South Asia. The immediate impact is being felt in the cities, straining the resources out of Bangladesh’s growth trajectory.

Bangladesh’s expected annual loss from tropical cyclones is some USD 1 billion (0.7% of gross domestic product), with an additional USD 300 million worth of assets at risk as a result of sea level rise. By 2050, agriculture, which represented 12% of the economy in 2021, will be at risk of declining by one-third as a result of climate variability. Furthermore, cultivable land will decrease by 18% in southern Bangladesh and 6.5% nationwide by 2040. Finally, environmental degradation will mean there will be a loss of human lives: 169 out of 100,000 inhabitants will succumb to premature deaths because of water salinity, extreme heat, infectious diseases and depression.

Green finance policy initiatives

The good news is that Bangladesh has mitigated many climate change impacts, and invested in climate-resilient infrastructure, clean energy and green value chains. Following its commitment to the Paris Agreement treaty on climate change in 2015, Bangladesh pledged to unconditionally reduce its greenhouse gases (GHGs) by 5% from business-as-usual levels by 2030. The country is well on its way to achieving its targets. Bangladesh prepared its emission-cutting Nationally Determined Contribution (NDC) Implementation Plan in 2018. After this, it adopted an overarching climate-focused policy, the Mujib Climate Plan, in 2021.

Implementation of the NDC targets requires heavy resources through climate finance, or green finance. Bangladesh has formed a Climate Change Trust Fund, which has USD 340 million for climate finance from public money. In 2011, the country’s central bank launched a green banking initiative to support environmentally responsible financing. It issued guidance for environmental risk assessment of borrowing proposals and for greening internal practices within financial institutions/banks.

…if Bangladesh wants to tackle climate change, then it has to tackle the money flow.

Bangladesh also created a Green Transformation Fund in 2016 (with an updated use guide in 2020). The central bank also released a Sustainable Finance Policy in 2020 (and it has a sustainable finance desk). The central bank’s policy dictates that in Bangladesh all banks have to allocate at least 2% of their loans to green finance and 15% to sustainable finance.

The Sustainable Finance Policy links financing to GHG reductions and climate resilience. This policy is important because its prudent implementation will mobilise resources for climate targets. The agenda is simple: if Bangladesh wants to tackle climate change, then it has to tackle the money flow. The sustainable finance taxonomy is designed to identify ‘green’ products from critical bottom-up sectors like agriculture, cottage industries, small and medium-sized enterprises (SMEs) and social businesses.

Policy gaps

As of 2021, USD 863 million has been disbursed as green finance in Bangladesh, which accounts for 3% of all term loans for the year. But there remains a notable gap in green financing in the country’s policy sphere. Bangladesh’s green financing policy gaps are identified here:

No attention for alternate finance: The ‘alternative’ financial sectors (which have natural alignment with green projects) are not regulated by the central bank. The number of impact investors, venture capital funds and private equity funds that are geared towards green projects, especially startups, is very limited. A recent report on startup funding in Bangladesh indicates that startups raised USD 112 million in 2022, a 73% increase on the previous year. However, none of these funds were directed towards green growth.

In India, Bangladesh’s largest neighbour, there has been a rise in climate-focused private funds. Venture capital funds like Avaana Capital actively seek out green projects in renewables and climate mitigation. CDC Group, a UK government-owned development finance institution, has already invested USD 70 million in a private equity fund managed by Eversource Capital. India has also recently secured a USD 300 million climate action investment from the European Investment Bank and the Global Environmental Facility, a global sustainability private equity firm. This money will channel businesses towards climate action.

There have been good efforts in Bangladesh. Notable is the Net Positive Accelerator, the Climate Change Accelerator for Bangladesh, a four-month programme focused on climate action launched by SBK Tech Ventures (a local venture capital fund) and ME SOLshare (a local renewable energy startup).

Public–private partnership absence: There is a lack of public–private partnerships in green financing. In a good partnership, the government plays a catalysing role in private capital flows in climate-resilient products. The private sector, particularly SMEs, is not well positioned to take the large-scale risks that are often associated with climate financing. The risk factor limits private financing, unless there is a risk-adjusted return. The public sector can support in reducing the risks in investing in climate-oriented infrastructure, regulatory instruments and research.

Disparity between big and small business: It is crucial to bank on the progress of the clothing sector, which is Bangladesh’s main export industry. The industry has positioned Bangladesh as the world’s greenest apparel sourcing destination. The Bangladesh Garments Manufacturer and Exporter’s Association (BGMEA), which is the industry’s main advocacy body, has undertaken some green initiatives such as the Strategic Environment, Social and Governance Vision 2030. This is good for the country. It shows that the private sector is coming forth with innovations.

However, it is small businesses that are falling behind on sustainable initiatives and investments. The reason is well understood: climate finance is both costly and risky for them. But policymakers cannot overlook the small businesses. In Bangladesh, small businesses make up 51% of the microeconomic sector and 40% of the overall economy, and employ 35% of workers. For any climate finance policy to have impact, small businesses have to be centre stage.

Small businesses have no support: Small businesses are less eligible for financing. This means they are also less likely to receive green financing. Unfortunately, these small businesses are more likely to contribute to GHG emissions; they often use old carbon-intensive technology. They are also less inclined to adopt new technologies on renewable energy and clean fuel. Moreover, they also do not have the know-how to apply for such funding. A policy framework should address this gap, by funding technical capacity-building of small businesses.

…climate finance is both costly and risky for small businesses.

Absence of risk mitigation strategy: The Sustainable Finance Policy dictates that banks focus only on refinancing existing loans. The policy needs to incorporate soft loans and low-cost funds for green projects. Such loans carry some inherent risk because investors fear the impact of political regime changes, regulatory barriers, sudden incentives withdrawal and unfair market conduct by competitors. The policy should address these risks. Incentives such as long-term tax subsidies will drive private players towards climate investments.

Reform recommendations

The reform agenda to boost green financing needs specific policy interventions. The creation of funds like the Climate Change Trust Fund and the Climate Change Resilience Fund means Bangladesh is putting its money where its mouth is. The country’s Sustainable Finance Policy also commits to achieving its NDC goals. Now the money needs to be channelled to small businesses. Only then will there be real ‘green’ impact. Bangladesh just needs to double down on the green finance policy agenda. Here are three recommendations:

1. Bangladesh needs a blended finance model to sustain long-term climate change initiatives. While the Sustainable Finance Policy of the central bank focuses on initiatives like renewable projects, alternative energy, waste management and recycling, it needs to factor in the inherent risks associated with small businesses and startups.

2. Strategies to boost access to finance for small businesses can be repurposed for green financing. The challenges are the same: collateral requirements, bureaucratic procedures, an information gap and lack of data. As a result, large firms with more capacity benefit from sustainable financing products. In turn, large firms improve their energy efficiency and can ‘green brand’ themselves.

For instance, Bangladesh’s clothing sector can leverage the funds from the Green Climate Fund, which is managed by IDCOL (a publicly owned climate fund). Small businesses focusing on renewables, waste management and rainwater harvesting face high transaction costs, upfront investments and market risks.

Therefore, Bangladesh needs an SME-focused climate finance risk mitigation strategy. This should facilitate access to no-collateral loans, prioritise renewable energy projects and create a de-risked investment climate.

3. Bangladeshi policymakers can encourage alternative financing through private equity and venture capital funds. This will build an innovation infrastructure. Venture capitalists often have a higher risk tolerance for untested products. There needs to be collaboration between foreign firms, local firms, government agencies and commercial financiers.

 

Photo ©️ Mahmud Hossain Opu

Iffat Mahmud is Regional Representative of Innovision Africa. She is an entrepreneur. She is Co-founder of OyaNow and Founder of EkoBangla. She specialises in market systems, e-commerce, agribusiness and the health sector. She pursued her graduate studies at Erasmus University of Rotterdam, Netherlands.