Annual Banking Conference 2022: 'Towards Sustainability' through Sustainable Finance

Illustration: TBS

Sustainability is associated with the quality of growth that takes care of economic, social and environmental aspects of progress. In this context, Environmental, Social and Governance (ESG) are increasingly gaining acceptance. Investors are increasingly applying ESG as part of their process in a changing global setting to manage risks and explore opportunities.

The 'Environmental' criterion refers to an organisation's environmental risk management practices, the 'Social' pillar refers to an organisation's relationships with its stakeholders, whereas 'Governance' refers to how a company is led and managed.

This is a holistic approach to sustainability that helps stakeholders understand how an organisation is managing risks and opportunities related to environmental, social and governance aspects. While the term ESG is often used in the context of investing, it is relevant for other stakeholders like customers, suppliers and employees.

There is growing evidence that ESG has beneficial effects on cost-cutting, increased productivity and effective investment. It is taking on an even greater significance in light of recent events, especially the Covid-19 pandemic, that disrupted normal life and business.

Improved awareness of society on environmental and social issues is demanding a wider range of commitments toward the environment, society and the people from the corporate entities and business entities of Bangladesh. These ventures are also associated with attaining the Sustainable Development Goals (SDGs).

Some corporations are, however, taking part in limited capacity, in clean drinking water programmes, renewable energy and carbon neutrality initiatives, and good agricultural practices, to raise the livelihoods of the farmers. In Bangladesh, there have been several regulatory interventions by different regulatory bodies to address the issue of ESG reporting.

Despite various efforts from different regulatory bodies, the level of ESG reporting in Bangladesh is not at a desirable level. There is still a long way to go to attain the expected level of ESG practices among business entities and corporations, to contribute to the sustainable growth of the country.

Banking and financial sectors' close association with sustainable growth

The approach to sustainable growth is very much within the broader scope of SDGs of the United Nations (UN), that address and integrate different dimensions.

To attain that, banks have a great role to play and sustainable action by banks goes beyond profitability. Alongside targeting profitability, through sustainable financing activities a bank or financial institution can ensure sustainability on economic, social and environmental fronts.

Sustainable financing cannot be desegregated from the key concerns of corporate governance and corporate social responsibility practices of banks.

Traditional finance focuses solely on financial return and risk, whereas sustainable finance considers financial, social and environmental returns. It moves from a narrow shareholder model to a broader stakeholder framework, aimed at long-term value creation for the wider community.

One key policy concern related to sustainable finance is financial exclusion. Finance, to be sustainable, must address the financial exclusion challenge at the individual and macro levels. Access to finance can economically and socially empower individuals, in particular poor people – allowing them to better integrate themselves into the economy, contribute to their development and protect themselves against economic shocks.

Financial inclusion can reduce poverty

There is proven evidence that a small loan, a savings account or a micro-insurance policy can make a great difference to a low-income individual or a family. In addition, access to financial services is often viewed as essential for access to safe water, health services and primary education. Financial inclusion issues are associated with the social and economic inclusion of women as well.

Considering the socio-economic benefits, agriculture and small or micro-enterprise financing cannot be delinked from the scope of sustainable finance in the context of most developing countries. In most instances, progress in agriculture and micro-enterprise sectors is associated with socio-economic advancement of the vulnerable and low-come sections of society. There is no doubt that designing effective financing products and delivery channels are crucial in attaining better outcomes for the poor. And in this context, the use of technology and digital financial services might bring remarkable changes. 

Green and climate finance: Crucial drivers of sustainable growth

Generally, potential sources of climate finance include commercial banks, investment companies, pension funds, insurance companies and sovereign wealth funds. According to the United Nations Framework Convention on Climate Change (UNFCCC), the developed countries are committed to delivering $100 billion to the most climate-vulnerable developing countries as climate finance.

Bangladesh gets funding from international initiatives like the Global Environment Facility (GEF), Green Climate Fund (UNFCCC fund), Climate Investment Funds (CIF), bilateral and multilateral channels, private funding every year. International sources supply only a quarter of Bangladesh's climate finance.

Green financing has been particularly encouraged by the Bangladesh Bank. Green financing activities have already attained several milestones since the central bank of the country issued its first 'Green Banking Policy Framework' and 'Environmental Risk Management Guideline' back in 2011.

Several changes and developments have taken place in the policy document over the years, especially, the introduction of the 'Sustainable Finance Policy' in  2020 is a notable reshaping of the policy approach that integrates social and sustainability-linked financing with green financing.

Effective implementation of sustainable and green financing under the broader and newer taxonomy of the 'Sustainable Finance Policy' is expected to offer greater force to both quantitative and qualitative development of sustainable financing ventures by banks and financial institutions. However, market players must also come up with a proactive approach through their associations for an optimum outcome.  

It is recognised that limited knowledge, awareness and capacity on inclusive and green finance are critical challenges. Bankers, especially who are engaged at the branch/field level and the intermediaries/suppliers must be motivated and need exposure to the use, benefits and technical aspects of inclusive and green products. It is likely that customers do not have familiarity with the products and it is even possible that they have not heard of the products at all. The financial industry needs financial literacy and a knowledge forum for optimising outcomes.

Bangladesh Institute of Bank Management's annual banking conference offers a knowledge platform to facilitate discussion by bringing together experts, academicians and researchers to exchange and share knowledge, experience and research outputs on banking and related issues. The tagline of the conference 'Towards Sustainability' reflects expectations to link plenary discussions with sustainability issues and concerns. 

Sketch: TBS

Dr Shah Md Ahsan Habib is a Professor Selection Grade of Bangladesh Institute of Bank Management [BIBM].

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.