Sustainable environment and society is as important as economic viability in an age where the world is struggling to balance the supply and demand of energy resources. With the pacing of industrialization and increased Greenhouse Gas (GHG) emission it has become quite evident that alternative energy resources are a must for sustaining the future energy demand.
In COP21 (2015), the most substantial and the first legally binding climate treaty was signed, coming into force in 2016. The treaty was initially adopted by 194 countries with an ambition to keep the global average temperature increment well below two preferably 1.5 degree Celsius above pre-industrial levels.
The same treaty also supports the Sustainable Development Goals (SDGs). In order to achieve the goals of the Paris Agreement, signatories are required to submit both legally binding and voluntary measures. The legally binding measures -- Nationally Determined Contributions (NDCs) are submitted by the signatories every five years starting from 2020 in order to achieve the goals of the agreement.
Bangladesh’s commitments
In this backdrop, aligning itself with international treaties, Bangladesh has become a signatory of the Paris Agreement and submitted its first Intended Nationally Determined Contributions (INDCs) in 2018 and subsequently submitted its final Nationally Determined Contributions (NDCs) in 2021.
Here, Bangladesh commits unconditional reduction of GHG emission by 5% and additional 10% with support from international partnerships from the business as usual (BaU) scenario by 2030. The NDC covers the following sectors: Energy, industrial processes and product use (IPPU), agriculture, forestry and other land use (AFOLU) and waste in line with the IPCC.
In COP26 (2021), in addition to the signing of Glasgow Climate Pact and to securing $100 billion for climate finance on an annual basis, decisions were made to reiterate the roles and goals of the Paris Agreement and Kyoto protocol. Commitments on phasing out of coal, deforestation, increasing investments in renewable energy, and fast-moving to electric vehicles were also made to reach net zero emission by mid-century. To bolster these initiatives and commitments, four key areas were focused in COP27 in the year 2022 -- mitigation, adaptation, finance, and collaboration.
To tackle the world’s, as well as its own, adversities, the government of Bangladesh (GoB) has demonstrated its unity with the global targets like SDGs, Paris Climate Agreement, etc. Moreover, in the ambition of GoB it is mentioned that by 2041 it would generate 40% of its energy through renewable energy, which while a challenging ambition is still a praiseworthy one.
All these have mandated that a bridge is built between the regulatory bodies like Bangladesh Bank and private sectors so that the country as a whole can achieve these ambitious goals and can ensure environmental and social governance.
Assessing sustainability risks
In this backdrop, Bangladesh Bank had developed and published the first Environmental Risk Management (ERM) guideline for the banks and financial institutions addressing the land degradation, water pollution, scarcity of resources, and air pollution in 2011. Later the social aspects were introduced in the ESRM guideline in 2017. In 2022, further developments were made to assess the impacts of any business on the environment and society, and subsequently to address climate and sustainability related risks.
Any aspect of an institution falls under the purview of different climate and sustainability risks which need to be considered in every decision. Both physical and transitional risks need to be incorporated in the risk assessment and anticipated factors like -- market risks, liquidity risks, and technological shift and demand shift due to the change in climate has to be included in the decision making.
Different sustainability disclosures like Taskforce for Climate-related Financial Disclosures (TCFD), the Value Reporting Framework (VRF), and Global Reporting Initiative (GRI), etc, came into place worldwide to bring a framework for addressing the climate and sustainability related risks and opportunities.
International Sustainability Standards Board (ISSB) proposed a new disclosure format International Financial Reporting Standard (IFRS s1 and s2) on climate and sustainability related risks and opportunities in 2022. This reporting format focuses on four areas -- governance, strategy, risk management, and matrix and targets, with a view to ensuring accountability for the GHG emission and getting an overall picture of climate and sustainability related risks and opportunities in an organization.
Bangladesh Bank, in December 2023, adopted the reporting format for the banking industry to ensure governance and accountability for the climate and sustainability related aspects. Also, this format would help the banks/FIs in understanding the climate related risks which might impact the repayment capacity of the client. Moreover, the reporting aims to assess the GHG emission due to different assets including loan portfolios to manage risks and identify opportunities to minimize emission.
Bangladesh has 213 LEED certified factories -- 80 (platinum) and 119 (gold) which exhibit both awareness and movement in the market to reduce the GHG emission
Devoted to green and sustainable finance
Sustainable finance refers to financial products and initiatives that promote environmental sustainability and social responsibility, with a focus on sectors like agriculture and CMSME. Green taxonomy, a structured approach within this framework, categorizes green products and projects.
Bangladesh Bank, in 2020 for the first time had imposed a target of 5% green finance of the total loan disbursed by any bank/FI. In 2021, this target was further revised to make it more realistic.
Bangladesh Bank in its sustainable finance policy had defined only the term loan as green finance, while any working capital/short term loan for the benefit of the environment would be considered as sustainable finance. With this demarcation, in 2021, banks and FIs were required to notify Bangladesh Bank their yearly target of green and sustainable finance as 2% and 15% of the last year’s loan outstanding, excluding classified loans.
In order to motivate the banks and FIs and to ensure that they put their best effort to achieve these targets, Bangladesh Bank, in 2020, proposed its sustainability rating methodology through top 10 banks and top five non-banking financial institutions (NBFIs) would be awarded as sustainable banks/NBFIs in alphabetical orders.
This rating was initially developed on four criteria -- sustainable finance indicators, CSR activities, green refinance and core banking sustainability. Later, in 2021, to make the rating more stringent another criterion -- banking service coverage was added. In 2023, the rating system was made holistic by incorporating the gender equality aspects.
Amidst all these regulations and guidance, Bangladesh Bank has been steadfast in channelizing and offering funds to support the green and sustainable projects which are capable of reducing the cost of the projects and reducing the negative impacts on the environment.
The notable low cost financing solutions developed for increasing the investments in green projects are Green Transformation Fund (GTF), Technology Development/Up-gradation Fund (TDF) and Refinancing Scheme for Green Products/Projects/ Initiatives. These funds are being utilized for projects like renewable energy, energy efficient machineries, biological effluent treatment plant and green building/industry in line with the NDCs under Paris Agreement.
The IDLC journey
IDLC from the very beginning of its journey has been unwavering in integrating environment, social, and governance (ESG) in its business strategies. In 2014, IDLC had first developed its Green Banking Policy (GBP) and Green Office Guideline (GOG) in line with the regulatory body, Bangladesh Bank in association with FMO and FI Konsult.
The policy was prepared by following the guidelines of Bangladesh Bank for handling affairs related to Green Banking combined with sustainability focus on IDLC and its membership in international sustainability initiatives (UNGC).
GBP did not only delineate the necessary green financing criteria, rather it widened the scope in different areas like green banking activities, ensuring resource efficiency, training and awareness, and as such. This GBP was again updated in 2022 for suitable application of the process.
Climate change and the risks associated with this change are imminent and are drastic in nature
Green Office Guideline (GoG) has been a beneficial tool or guideline for the employees where specific instructions were provided for employees on reducing energy usage and thus minimizing GHG emission. In 2022, IDLC Finance PLC developed its own sustainable finance policy and the organization has exhibited a rising trend in green finance over the years.
IDLC has been focused in capacity building and supporting clients through low cost financing solutions under different refinancing schemes of Bangladesh Bank. It has been acting as a significant bridge between end borrowers and Bangladesh Bank in channeling Bangladesh Bank’s funds to green and sustainable projects. Till 2023, IDLC has been successful in availing low cost financing worth Tk2,344 million for different green projects. In 2024, till date, the number stands at Tk1,919m.
Over the years, there have been significant investments in LEED certified factories especially in the RMG sectors. Currently, Bangladesh has 213 LEED certified factories -- 80 (platinum) and 119 (gold) which exhibit both awareness and movement in the market to reduce the GHG emission. This initiative not only ensures structural safety but also portrays the increased sustainability in the manufacturing sector.
As of June, 2024, IDLC has a portfolio of approximately Tk1,862m of green building/industry and it aspires to increase this size over the years. Moreover, till June, 2024, IDLC had disbursed a total loan of Tk779m in rooftop solar projects of almost 15 MWp. These projects have significant impacts in lowering the GHG emission and thus have positive impacts on the environment. As of June, 2024 IDLC’s renewable energy portfolio stands at Tk1,066m.
IDLC in association with FMO and FI Konsult had successfully implemented Environmental and Social Management System (ESMS) in 2016, which was in line with the ESRM guidelines of Bangladesh Bank, IFC exclusion list and ADB safeguard for financing. The tool included E&S Checklists and 22 Sectoral E&S Guidelines. Environmental and Social Due Diligence (ESDD) is being ensured for all new and existing business relationships. IDLC adopted ESRG guidelines of Bangladesh Bank in 2022.
IDLC has adopted Global Reporting Initiative (GRI) as an organizational guideline for sustainability reporting and has been publishing Annual Sustainability Report in accordance with Global Reporting Initiative (GRI) Guidelines since 2011.
IDLC Finance PLC is the first among banks and NBFIs to become a member of United Nation Environment Programme Finance Initiative (UNEP FI) in Bangladesh. It has been a member of this international platform since 2010 and under this initiative it has signed up in different initiatives like Principles for Responsible Banking (PRB), Collective Commitment to Climate Action (CCCA), Tobacco Free Portfolio and Net Zero Banking Alliance (NZBA).
In order to align with the requirement and ambition of CCCA and NZBA, IDLC on-boarded external third party consultant in 2023. In association with the assessment of the third party, IDLC has disclosed its GHG emission for both its internal operations and loan portfolio (Scope 1, Scope 2 and Scope 3) and disclosed SMART targets to reach net zero emission by 2050 on March 2024. The targets were taken after considering the IEA scenario analysis and NDCs of the country.
Climate change and the risks associated with this change are imminent and are drastic in nature. Over the last decade, globally, there has been significant movement in the climate and sustainability related areas to address the changes. However, it is quite evident that more stringent initiatives in case of governance and accountability and more investments towards climate finance are required to tackle the climate change and the anticipated risks.
Both the Bangladesh government and Bangladesh Bank have tried to incorporate the climate related factors in their decision making and have tried to come up with different regulations and guidance for dealing with climate change and pollution. In upcoming days, hopefully, there will be more robustness and awareness to create a sustainable world. Because if not now, then when?
Asif Saad Bin Shams is the Chief Risk Officer and Deputy Managing Director, IDLC Finance PLC.