Banks and other financial institutions have a unique and decisive influence on a business through lending, investment and advisory services.
Realising this, Paris Agreement highlighted the importance of FIs to limit global warming to 2 degrees Celsius, preferably to pre-industrial 1.5 degrees Celsius.
Banks and other FI can play a vital role to reduce carbon emission by investing more in green technology and shifting away from its financial flow from emission-intensive sectors to environment-friendly sectors.
Several large and reputed multinational Banks and FI including JPMorgan Chase, Bank of America, Wells Fargo, Citibank, Goldman Sachs Morgan Stanley and others met in COP-26 to talk over the leadership role of the financial industry on the road to net-zero under the UN-convened ‘Glasgow Financial Alliance for Net Zero’ (GFANZ).
More than 160 financial institutions with USD 70 trillion in assets have joined the GFANZ to meet the goal of the net-zero economy and the Paris Agreement.
Since Paris Agreement the term net-zero, sustainable finance, green finance gained mass popularity across the financial industry all over the world.
However, many of us are still sceptical about net-zero, green and sustainable finance. There is a concern about profitability too. The synergy between carbon neutrality and financial institutions is yet not fully understood.
Understanding the interlinks
If a Bank finances a fossil fuel project, it is responsible for emissions associated with that project. Greenhouse Gas (GHG) emissions and environmental pollution are the negative externality of economic activity.
Economic activity circles around Banks and financial institutions. Thus, financial institutions can be the front fighter against climate change and other environmental pollution.
Bangladesh has been experiencing tremendous economic growth for the last couple of years. At the same time, the environmental performance of Bangladesh is getting poorer, which is reflected in the latest Environmental Performance Index (EPI)-2020 report, published by Yale and Columbia University.
Why banks, FIs in Bangladesh like fossil-fuel-based-project
Being a signatory of the Paris Agreement, Bangladesh recently submitted the updated NDC proposing a 6.73 per cent (27.56 MtCO2e) reduction in unconditional and an additional 15.12 per cent (61.91 MtCO2e) reduction in a conditional scenario from the business as usual level by 2030 from the sectors of energy, industrial processes and product use, agriculture, forestry, and other land use, and waste.
It can be assumed that almost all Banks, NBFI, and other FI of Bangladesh have fossil fuel-related assets on their balance sheets. Most of the Banks of Bangladesh have been favouring fossil fuel-based projects like Coal and HFO based power plants over solar based-power plants considering the associated capital cost, profit and relatively lower efficiency of renewable sources of energy.
Non-green assets nearing the end?
However, in the near future, the scenario may completely be altered. The good stories of fossil fuels will come to an end shortly. Non-green assets may turn into bad assets.
Tomorrow’s customers will be way more conscious about the environment and climate than before. Statistics showed around 58 per cent of the customer of the United States consider the producer’s environmental footprint before purchasing the product.
The numbers will be higher in the European market. From time to time the numbers are expected to be high as well, which will be reflected in the asset of Banks or FI.
Realising the risk of carbon emission, Ford, G.M. and Mercedes declared to work toward selling only zero-emissions vehicles by 2040 for instance.
Opportunity for the industry, unseen
In addition to the physical, liability, transition and other risks associated with climate change, it also brings enormous opportunity for the financial industry.
In order to support the inevitable low carbon economic transition, the financial industry can utilise unlimited business opportunities by offering innovative financing products for renewable power generation, energy efficiency improvements, green transport, green buildings, climate-smart SME and agriculture.
The banking industry of Bangladesh needs to modify its financial product offerings in line with the momentum of green transformation both locally and globally.
Customer needs for green and sustainable financial products must be addressed by our local Banks and FIs through various customised green products. Retail banks can focus on creating advantageous products to finance low-pollution vehicles or sustainable real estate improvements.
Green insurance and venture capital
Green project financing, Carbon finance, green corporate loans, green securitisation can be examples of green products in corporate banking. Green insurance, climate insurance are popular products for the insurance industry globally.
Venture Capital can act as a catalyst for green business ideas, climate-based startups. Even if the demand for green products is not yet fully created, the financial industry can create the demand through various innovative financing models.
In addition to environment-friendly and climate-smart financing, FI can disclose and disseminate climate-related risks as part of knowledge sharing and awareness-raising.
As such, the customers will be more aware of green products. Climate and environment-related disclosure will even motivate and aware the board of directors which will accelerate green and climate governance.
Nowadays, foreign investors and development partners like IFC-World Bank, Asian Development Bank, JICA, KfW, AfD and others are highly aligned with the climate goal of the Paris Agreement.
Compliance with environmental-social standards and net-zero goals will provide added advantage to our local Banks and financial institutions in fundraising. Those Banks and FI will be one step ahead compared to conventional banks.
Sustainable Finance Department of Bangladesh Bank is leading the way in green finance with a supportive regulatory environment to boost green investments.
Still, many Banks and NBFIs of Bangladesh are considering sustainable finance and green finance as a Corporate Social Responsibility and regulatory requirement. Instead, banks and financial institutions of Bangladesh should grab it as a tremendous opportunity.
In the future, all finances will be sustainable finance. Let’s be prepared beforehand to cope with the upcoming changes in the financial industry.
The writer is a banker and sustainable finance professional