A Sustainable Banking Network (SBN) Task Force Report June 2020 Country Addendum to the SBN Report Necessary Ambition: How Low-Income Countries Are Adopting Sustainable Finance Profile to Address Poverty, Climate Change, and Other Urgent Challenges Bangladesh © International Finance Corporation [2020], as the Secretariat of the Sustainable Banking Network (SBN). All rights reserved. 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 Internet: www.ifc.org The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. IFC and SBN encourage dissemination of their work and will normally grant permission to reproduce portions of the work promptly, and when the reproduction is for educational and non-commercial purposes, without a fee, subject to such attributions and notices as we may reasonably require. 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Additionally, “International Finance Corpo- ration” and “IFC” are registered trademarks of IFC and are protected under international law. Bangladesh SBN Member: Bangladesh Bank (BB) (member since About this Country Profile: 2012) This Country Profile is an addendum to the SBN report: SBN Working Groups: Measurement Working Group, Necessary Ambition: How Low-Income Countries Are IDA* Task Force, and Green Bond Working Group Adopting Sustainable Finance to Address Poverty, Climate Change, and Other Urgent Challenges. The Key policy documents: report and country profiles for the first time capture in a systematic way how sustainable finance is being ◻ Policy Guidelines for Green Banking harnessed by low-income countries to address a (Bangladesh Bank, 2011) range of common environmental and social priorities ◻ Guideline on Environmental and Social Risk and drive financial sector innovation despite market Management (ESRM) for Banks and Financial constraints. Institutions in Bangladesh (Bangladesh Bank, 2017) The report and profiles complement and build on ◻ Guidance on Sustainability Reporting for the data collection and analysis for the SBN 2019 Listed Companies (Dhaka Stock Exchange, Global Progress Report, which covered 39 emerging 2019) markets. They delve deeper into the experiences of 8 low-income countries in the SBN network through an SBN Progression Matrix Stage (2019): Advancing – online survey, interviews, and desk research. the country has adopted national sustainable finance policies, has implementation tools and initiatives in This country profile has four sections: place, and requires reporting by financial institutions. ◻ The Drivers of Action – factors that spurred SBN and IFC role: IFC, through the Asia regional the country to develop sustainable finance Environmental and Social Risk Management (ESRM) policies or voluntary principles. Program for financial institutions, has provided ◻ The country’s Experiences in Developing technical support and advisory services to BB in Sustainable Finance Frameworks and what relation to policy development, implementation, and was learned in the process. capacity building. Through SBN, BB has consistently shared its experience with other SBN members and ◻ Future Priorities for the country as it benefited from the collective knowledge base. IFC continues to develop its sustainable finance estimates the country’s climate-smart investment systems. potential in selected sectors is nearly $138 billion.1 ◻ How the country views linkages between sustainable finance policies and Broader Development of its Financial System. * IDA stands for the International Development Association (ida.worldbank. org), an international financial institution under the World Bank Group that offers concessional loans and grants to the world’s poorest developing countries. Country Profile - Bangladesh 1 1 Drivers of action those of other IDA SBN member countries. As with other SBN banking regulator member countries, the What factors spurred Bangladesh to policy environment in Bangladesh was an important develop sustainable finance policies? driver. This is reflected by the inclusion of social factors into the Environmental Risk Management Guidelines In Bangladesh, promotion of sustainable finance in 2017 in response to national commitments to the has been driven by national policymakers. Sustainable Development Goals (SDGs). In common Bangladesh Bank developed both the Policy Guidelines with other countries with established sustainable for Green Banking and the Guidelines on Environmental finance systems, this process has been supported by and Social Risk Management. This is reflected in national commitments to sustainable development and Figure 1, which compares the important drivers of concern for environmental and social (E&S) challenges. sustainable finance development in Bangladesh to Figure 1 National level policy environment, policymakers, and awareness of its E&S challenges have driven the development of sustainable finance frameworks in Bangladesh High Medium Low N/A Policy environment: Na˜ona l commitments to the Sustainable Development Goals (SDGs), Paris Agreement on Climate Change, or a Na˜onal Sustainable Development Policy Policymaker and/or regulator engagement: Na˜ona l guidelines or regulatory requirements i to be°e r-manage environmental and social (E&S) risks in the f nancial sector, improving financial stability Coordinated voluntary approach: Ini˜a˜ve taken by local financial ins˜tu˜ons to adopt interna˜onal good prac˜ce in sustainable finance and level the playing field Market incen˜ves: Opportunity to increase compe˜˜v eness and resilience of the f n i ancial i ance sector through innova˜on in green and socially inclusive f n Environmental and social challenges: E&S risk exposure that foster par˜cipa˜on of financial ins˜tu˜o ns to address the E&S risks at the country level Peer experience: Demonstra˜on e˛ ect of countries that have adopted a sustainable finance roadmap Note: Large dots represent Bangladesh’s responses; small dots represent those of other countries. Source: SBN IDA Diagnostic Survey responses 2 Developing a sustainable Bangladesh Bank started by developing green banking guidelines for banks and financial finance framework institutions – with “green banking” at the time seen as focusing initially on management What process did Bangladesh go through of environmental risks in financial sector to develop frameworks to promote transactions. Policy Guidelines for Green Banking sustainable finance, and what was learned were published in 2011 and establish three phases of along the way? implementation, described in the figure below. These guidelines also set out a framework for banks to report Bangladesh began its journey toward sustainable their initiatives and/or activities on a quarterly basis to banking in 2009 due to its vulnerability to climate the central bank. Additionally, they set out the benefits change. Bangladesh is densely populated, and of compliance for banks, such as points to be gained sustainable development is critical for the country to to improve the overall rating of the bank. In 2013, continue its growth. Sustainable banking was seen these guidelines were extended to all other financial as a pathway to support sustainable business and institutions in Bangladesh, beyond banking. sustainable agriculture. 2 Necessary Ambition – An SBN Task Force Report Figure 2 Summary of implementation phases of the Policy Guidelines for Green Banking Phase 1 Phase 2 Phase 3: Included policy formula˜on and Included the incorpora˜on of sector A˝ er the system of Environmental governance, the incorpora˜on of specific environmental policies, green Management was in place, Phase 3 environmental risk in credit risk strategic planning, se˛ng up gr een could begin. It included designing and management, ini˜a˜on of in-house branches, formula˜ng bank specific introducing innova˜ve products, and environmental management, environmental risk management plan repor˜ng in standard format with introduc˜on of green finance and the and guidelines, repor˜ng of green external verifica˜on. crea˜on of climate risk funds banking ac˜vi˜es Source: SBN IDA Diagnostic Survey responses Bangladesh Bank published the Environmental Risk In 2018, Bangladesh Bank launched the Management (ERM) Guidelines in 2012, and these Environmental and Social Due Diligence Risk were upgraded and replaced in February 2017 to Assessment Tool and the Green Banking Reporting include social risk. Directed at banks and financial template to help FIs effectively implement and report institutions, the guidelines set out how to include ERM their sustainable finance activities. Banks are required policies in existing credit risk management procedures, to report data using the template to Bangladesh Bank with the goal of improving the sustainability of the quarterly and disclose their green activities on their banking system. In 2017, new guidelines were written websites annually. to include social risk and reflect the SDG commitments made by Bangladesh. Initially, Bangladesh Bank’s challenge was a lack of understanding from the banks and a need In 2014, Bangladesh Bank set a minimum annual for capacity building. There was low awareness target for 5 percent of total loan disbursements among banks about the links between environmental and investments by banks and FIs to go to green vulnerability and the credit risk of their portfolios. At businesses, projects, and sectors. To assist the time, banks only used traditional metrics for credit allocations, Bangladesh Bank developed a list of risk. Climate change was also a new topic for most green products and initiatives eligible for financing banks. Bangladesh Bank gradually built awareness and provided clear parameters for financing green by first focusing on discussions about environmental innovations. The result was a list of 52 products vulnerabilities, particularly in terms of the physical and initiatives across eight categories and a product contexts for specific projects. Numerous trainings innovation/development methodology to assess green were conducted to get middle and higher-level finance initiatives. management excited about the benefits of sustainable banking. Banks at the time also lacked environmental specialists, but training was offered to remedy this. Figure 3 The solutions Bangladesh found to address challenges in sustainable finance implementation Challenge Solu˜on Extensive training, including workshops and train-the-trainer sessions Capacity constraints within banks to implement sustainable finance Development of addi˜onal guidelines, templates, and taxonomies Banks o° en priori˜ze profits over sustainability Engagement with banks to persuade them of sustainable finance benefits Source: SBN IDA Diagnostic Survey responses Country Profile - Bangladesh 3 The current challenge is making sustainability Bangladesh has separate policies to cover multiple issues a priority. The banking system in Bangladesh areas of sustainable finance – both risk management has faced difficulties in recent years, and this has led and business opportunity. An overarching framework to sustainability taking a back seat to other issues. will have a number of benefits, including assisting Bangladesh Bank is currently working to make sure investors to see what is going on more clearly and sustainability is always important. identify ways they can participate. Nevertheless, Bangladesh Bank has seen tangible Bangladesh has also started to assess its potential improvements in banks’ attitudes toward for green bonds. Bangladesh Bank, with the support sustainability. An estimated seven banks have of IFC, is looking into the potential, modalities, and developed their own Environmental and Social Risk procedures for rolling out green bonds in Bangladesh. Management (ESRM) guidelines, which sometimes In early 2020, IFC and Bangladesh Bank jointly go beyond the standards set by the central bank. published a report on market solutions and policy Bangladesh Bank has also found that banks are starting tools that could help to overcome current barriers to to take the initiative in requesting support from them creating a national green bond market and help realize on this topic, which is a significant shift. the country’s climate-smart investment potential of $172 billion by 2030.2 3 Future priorities Figure 4 compares Bangladesh’s ongoing challenges in developing a sustainable finance What are Bangladesh’s priorities as it system with those faced in other SBN IDA countries. continues to develop a sustainable financial Similar to peer countries, there is significant focus system? on a supportive enabling environment and capacity building, as well as developing specific tools to support The next step is to create an overarching sustainable finance implementation. sustainable finance framework. As described above, Figure 4 Ongoing challenges that might hinder the development and implementation of sustainable finance Importance to IDA countries High Medium Low N/A Build the capacity of regulators and financial ins°tu°ons Enabling environment and capacity building Enhance coopera°on among financial ins°tu°ons Provide clear incen°ves for sustainable finance Develop and launch a sustainable finance roadmap Expand sustainable finance to other financial sectors Develop a taxonomy of green/socially Specific regulations inclusive projects or tools Promote public available environmental data Create green asset guidelines, incen°ves, and awareness Note: Large dots represent Bangladesh’s responses; small dots represent those of other countries. Source: SBN IDA Diagnostic Survey responses 4 Necessary Ambition – An SBN Task Force Report 4 Broader financial sector Figure 5 compares Bangladesh’s concerns related to financial sector development with other SBN IDA development countries. Sustainable financing is the tool to achieve sustainable development. Both agriculture and small How does a sustainable financing system and medium enterprises (SMEs) need to become more in Bangladesh connect with broader sustainable, as this would enable banks to choose to ambitions? finance them and create a virtuous cycle. Resource Stakeholders in Bangladesh are concerned about efficiency is critical in Bangladesh. If the country does broad financial sector development, both with not grow sustainably, it will be difficult to sustain its regard to cross-cutting and sector-specific issues. current standard of living. Figure 5 Key areas of concern related to financial sector development for Bangladesh High Medium Low N/A Financial inclusion Cross-cu˜ ng issues FinTech/digital finance Long term financing Environmental and social risk management Agricultural finance Sectoral financial areas SME finance Climate and green finance Disaster risk finance, disaster/weather insurance Note: Large dots represent Bangladesh’s responses, small dots represent those of other countries. Source: SBN IDA Diagnostic Survey responses “ In the context of a circular economy, resource efficiency is key. Thus, sustainable finance has a larger role to play in poverty reduction. - Bangladesh Bank ” 1 IFC. 2016. Climate Investment Opportunity Report. 2 Bangladesh Bank & IFC. 2020. Green Bond Development in Bangladesh: A Market Landscape. Country Profile - Bangladesh 5 Access SBN knowledge resources at: www.ifc.org/sbn Access the SBN Necessary Assessment Report and its associated Country Profiles at: www.ifc.org/sbnnecessaryambition