Green finance in Bangladesh needs a long-term perspective

Over the last decade, Bangladesh has sustained an impressive growth trajectory. Notably, this growth has kept pace in spite of significant challenges – scarce natural resources, environmental degradation, population pressure, widening economic inequality, climate-related vulnerabilities, to name a few. This has, in turn, put pressure on policymakers to rethink growth strategies to ensure that growth strategies followed by the country are ‘sustainable’. A key element of sustainability is a ‘green’ growth path, which is not only expected to limit the environment, but also improve the productivity of natural resources by enhancing the quality of the stock.

Green finance is not new to Bangladesh. The Government of Bangladesh has invested significantly in the sector, creating funds managed by line ministries and the central bank, Bangladesh Bank for the promotion of green finances. A wide variety of funding sources – domestic and international – have been mobilised to ensure that a significant volume of green finance is available. Within this, grants and soft-credit products have typically constituted the majority.

By their very nature, most of these products are short-term instruments, with little flexibility of use and repayment. This short-termism is not without good reason. Banks by nature tend to be risk-averse, and due diligence, when carried out properly, often results in financing being directed to credit-worthy projects assured of timely returns, carried out by establishments that have a proven track-record. Such an environment is usually not conducive to innovations, or risk-taking. As a result, the market for green finances remains limited, and even the allocated amounts have remained largely underutilised in the country. To change this scenario, one must look at a diversifying the portfolio mix of green financing options available in Bangladesh.

The nature of financing that would fuel the growth of ‘green’ businesses is quite a specific one. Such finance must have three essential qualities: (1) they must demonstrate a high risk-appetite; (2) they must be scaleable, and responsive to the needs of the industry; and (3) they must focus on impact. In sum, they must adopt a long-term perspective.

Possibly the most direct mechanism is to attract greater levels of equity finance to green businesses. Equity investors are able to fund ideas and entrepreneurs at a nascent growth stage which allows them to assume greater risk. This, in turn, opens up opportunities for entrepreneurs to experiment with new technology required to go beyond ‘business as usual’ approaches. In Bangladesh, there have been both local and foreign equity financiers that have invested in successful green ventures that either ventured into new sectors that contributed to environmental management, or adopted technology that was still new to Bangladesh.

For instance, the first recycled PET resin manufacturer in the country, Bangladesh Petrochemical Company Ltd., received equity funding from US-based venture capital firm DEFTA Partners. A number of Nordic companies have expressed interest in green energy and clean technology in Bangladesh. World Wide Recycling BV of the Netherlands established a joint venture with the Bangladeshi firm, Waste Concern, to produce energy out of waste using no-burn technology such as biogas generation, landfill gas collection and electricity generation.

Another option for green finance is to target impact investors. Impact investing, which is defined as “investments made into companies, organisations and funds with the intention to generate social and environmental impact alongside a financial return”, is gaining ground in Bangladesh. Over a dozen impact investors have already invested over US$1 billion in different projects in Bangladesh promising positive environmental, social and economic return. 30% of this impact funding has been made in the form of equity investments.

At the UN General Assembly last year, with Prime Minister Sheikh Hasina in attendance, the United Nations Development Programme and Build Bangladesh, the social impact arm of Impress Group, a large Bangladeshi conglomerate, launched a new ‘impact fund’ that intends to raise over US$100m from private investors to back ventures that create positive social and environmental impacts in Bangladesh to meet Sustainable Development Goals. Realising returns through future IPOs is a core strategy of this fund, whose first project is a $3.5 million affordable housing venture for urban migrants.

There also exist large foreign institutional investors who are increasingly looking to expand their exposure to sustainable investments, for instance, the Norwegian Sovereign Wealth Fund. Bangladesh’s position at the forefront of global efforts to tackle the adverse effects of climate change makes it an attractive destination for such investors.

 

Encouraging equity investments requires sound regulation and safeguards. A key player in this regard is the Bangladesh Securities Exchange Commission (BSEC), who can take substantive steps to green stock markets. A UNEP report from 2016 cites the examples of the Mauritius Stock Exchange and the Egyptian Stock Exchange, which developed indices to identify companies based on sustainability practices, using international standardised criteria. This, and highlighting green (or sustainable) practices of companies listed in a stock exchange can help to increase investor-awareness, and also create a foundation to offer benefits to companies that show a strong performance on green parameters. In any case, investors in stock markets have a right to full disclosure about the financial health and prospects of the company they invest in, as well as to be aware of the measures taken to limit damage to the environment from their operations.

However, questions remain about the capacity of stock exchanges to undertake these reforms. At the very least, it will require sure-footed leadership to turn the focus towards green finance at a time when the financial sector, in general, is in turmoil. A top-down approach pushed by the BSEC or GoB may not be enough. This is an area where businesses, investors, regulators and policymakers need to put their heads together to come up with solutions. This promises to be an exciting space to follow in the years to come!

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This first appeared in The Daily Star/

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