Green financing in Bangladesh's RMG industry
Bangladesh's RMG industry is increasingly prioritizing the issue of sustainability. Our industry's leaders recognize that sustainable production is essential in order to attract and retain international fashion brands and retailers - most of which now have firm targets set for the reduction of carbon emissions.
To achieve these carbon reduction goals, the fashion industry is inherently dependent on its supply chain. Cleaner production, increasing use of renewable energy and the implementation of smart technologies are among watchwords of our RMG industry as it strives to become the 'go-to' sourcing hubs for progressive apparel brands.
All of the above requires investment, however, and to this end, we are seeing a huge growth in sustainable or 'green' financing/green funds as well as the increased use of environmental, social and corporate governance criteria to evaluable investments and their social impacts.
Green finance is a structured financial activity which has been developed to ensure a more desirable environmental outcome.
Green Finance in Bangladesh: To become a leader in sustainable apparel production, Bangladesh needs to simultaneously adopt and embrace green finance mechanisms. At present, domestic banks and financial institutions have made a certain amount dedicated to green projects. Bangladesh has also taken several steps to encourage green financing, starting from establishing green banking policy guidelines, concessional refinancing schemes, and so on.
Alongside this, there is a limited amount of green equity finance as well, and currently approximately 15 venture capital firms are working on green projects. Such projects in Bangladesh are actively attracting the attention of both local and foreign investors, which includes venture capital firm DEFTA Partners and a number of Nordic companies amongst others.
Despite the green banking policy guidelines, there is a very slow promotion of such sustainable projects, due to a lack of a proper management and active interest of banks and financial institutions to manage such funds.
In Bangladesh, approximately 50 sectors were identified as eligible to receive direct green finance, up until 2017 with majority applications for such funding being made by small scale local entrepreneurs on one hand, and the apparel and textile sector on the other.
A major barrier to our businesses in attracting green funding is proving creditworthiness in the form of equity or liability. This is hindered by the lack of proper documents and/or the insufficient fulfillment of the non-exhaustive list of requirements. Furthermore, the implementations of sustainable projects require high transaction costs which often tend to over-shadow their benefits.
With such projects requiring new enhanced technology, this can generate considerable risk and uncertainty, alongside existing operational and market risks. These projects rely on the current guidelines of Bangladesh Bank and are highly vulnerable to policy changes.
For all the above reasons - and several others - despite the guideline of a minimum of 5 per cent loan portfolio for green projects, Banks and FIs don't have enough favourable proposals to provide the same.
Bangladesh Bank instructed banks and other FIs to allocate at least 10 per cent of their annual CSR budget to the Climate Risk Fund, either by providing direct grants or by providing finance at a reduced rate of interest.
The Bangladesh government has established two flagship green funds, namely the Bangladesh Climate Change Trust Fund and the Bangladesh Climate Change Resilience Fund, created with the aim of funding green projects and reducing the development time.
Bangladesh has also received total grants worth US$143.59 million to implement 41 projects from the Global Environment Facility which was established in 1991.
The World Bank set up a Climate Investment Fund in 2008 with funding from 14 developed nations, the UK being the leader.
In addition, the World Bank instructed banks and FIs to provide financing for solid waste management systems, rainwater harvesting plants, and solar power panel projects. Though Bangladesh has not yet incorporated any inclusive green financing strategies, the Bangladesh Bank has been promoting green financing through concessional refinancing schemes and credit quotas for FIs as well as formulating guidelines for green banking.
In January 2009, The Bangladesh bank established a refinancing scheme worth Tk. 2 billion for "Renewable Energy and Environment Friendly Financeable Sectors" to facilitate financing possibilities for green products, the major catch for the RMG. In 2016 it set a mandatory 5 per cent credit quota for direct green finance out of the total loan disbursement of all banks and FIs.
Main barriers of sustainable finance: Lack of access to sustainable finance to industries in Bangladesh - mainly RMG manufacturers - is a major barrier in the development of a sustainable industry. There is an inherent lack of coalition among industry & finance sector stakeholders. Foreign buyers do have a keen interest to develop and to work with sustainable suppliers and sustainability criteria is increasingly common in contracts with fashion brands and retailers.
Foreign banks are ready to provide finance for developing a sustainable industry, but the infrastructure of our economy is such that they cannot directly facilitate the finance. The channel has to be realized through national commercial banks to the individual industries, as an independent means of financing factories while safeguarding against hostile buyers as well. This is where the grass-root challenge lies.
Additionally, sustainable projects are further hindered by lack of a comprehensive legal and regulatory framework and technical data, due to lack of adequate research and development work in this field.
Investing in RMG manufacturing needs more robust understanding from the perspective of financiers so that we can achieve greater confidence regarding making investments. In addition, we need to innovate new financial tools that will increase RMG manufacturer's access to finance, requiring a dialogue between apparel industry stakeholders, the finance sector, entrepreneurs and other partners.
How to overcome the problems: To achieve access to sustainable funding, we need to firstly assess the financial implications associated with environmental risks. Identifying incentives, both financial and non-financial, to encourage entrepreneurs to adopt sustainable options shall further facilitate the new regime.
Bangladesh Bank is overseeing green finance in industries, piloting policy decisions for environment and social safeguards for banks and FIs, to be followed while disbursing green finances to commercial enterprises.
But the government's intervention is of utmost necessity, especially in the case of subsidizing the FIs and Banks, and providing sustainable and/or green financing to industries at a lower interest rate,
To address and resolve these challenges, it is necessary to make the SFU functional. The risks involved with instatement and proper functioning of sustainable green projects in countries like Bangladesh makes the entire concept pretty unsuitable for banks and FIs to be investing in.
Being susceptible to policy changes, a more rigorous risk assessment profile for sustainable projects must be done. The Banks and FIs must offer some joint responsibility to share the risks ensuring more such ventures flourish. BGMEA and other like-minded organizations will make plausible cooperation with the commercial banks so as to realize these government-allocated funds effectively, to ensure proper access to the available finance.
The writer is a director of Bangladesh Garments Manufacturers and Exporters' Association, BGMEA