“In the context of a circular economy, resource efficiency is key. Thus, sustainable finance has a larger role to play in poverty reduction,” says Asif Iqbal, Joint Director, Sustainable Finance Department at Bangladesh Bank, the country's central bank.
Bangladesh is one of a number of low-income countries around the globe which has embraced the move towards sustainable financing – and is a member of the IFC-facilitated Sustainable Banking Network.
And with the World Bank estimating the impact of the COVID-19 pandemic could push between 40 to 60 million more people into poverty, sustainable finance is more important than ever to help economies re-build and help people out find a path out of poverty, according to a senior IFC official.
“At a time when low-income countries across Asia and the Pacific are being adversely impacted by COVID-19, it’s all the more vital for countries to embrace sustainable financial development to build resilience for the future,” says Nena Stoiljkovic, IFC’s Vice President for Asia and Pacific.”
In view of this, a new report by the Sustainable Banking Network (SBN) highlights why sustainable finance is no longer a matter of choice, but a necessity.
The study, “Necessary Ambition: How Low-Income Countries Are Adopting Sustainable Finance to Address Poverty, Climate Change, and Other Urgent Challenges,” focuses on 11 low-income countries and how they are working to transform their financial systems toward sustainability. For the first time, the report uncovers the drivers and innovations that underpin their efforts, capturing practical lessons that will benefit other emerging markets as well.
Out of these 11 countries, six are from Asia — Bangladesh, Cambodia, Lao People’s Democratic Republic, Mongolia, Nepal, and Pakistan. And the report shows Bangladesh, Nepal, and Mongolia are showing a strong momentum for green finance, keeping pace with more mature markets.
In addition to green finance, the- countries are also exploring ways to expand sustainable finance to other areas such as finance for small and medium sized enterprises, SMEs, and agriculture. This is pertinent because in the last decade, these three countries have been severely affected by extreme weather events. Contrary to common perceptions, the study shows, these countries are resolute in their commitment to promoting sustainable finance amid COVID-19.
The report also reveals financial inclusion, SME finance, and lending to women are often seen as essential components for sustainable finance. Supporting climate resilience and inclusion are among IFC’s priorities in the region.
Sustainable finance frameworks and practices are an effective tool for emerging economies in Asia to increase their market resilience and unlock new green and inclusive investment opportunities. Building sustainability into financial systems not only helps manage environmental, social and climate risks, but also enables greater investment flows and deepened financial market development.
CEO and a Board Member of the Mongolian Sustainable Finance Bankers Association and Co-chair of the SBN IDA Task Force, Naidalaa Badrakh says there is positive evidence of changes in the way banks are managing environmental and social risks, compared to five years ago.
Last month, Mongolia’s Financial Regulatory Commission and IFC signed an MOU to further develop the market for green finance in Mongolia, including through green bond guidelines and financing of environmentally friendly projects and practices in the country.
While countries in Asia have made significant progress — Bangladesh, Cambodia, Mongolia, Nepal, and Pakistan have established their national sustainable finance frameworks — the report finds, they still face several challenges including capacity building and creating a supportive enabling environment.
To address these issues, the report says sustainable finance frameworks should address broader environmental and social challenges. Additional support, guidance, and incentives are also essential to drive adoption by financial institutions.
As a sign of the focus on green finance, the report says promoting “green”, such as green bonds and green loans, is a key focus in Bangladesh and Mongolia. The two countries, along with Nepal, are also working on developing national sustainable finance roadmaps as part of efforts to reduce market risk and incentivize green finance flows.
Dev Kumar Dhakal, Executive Director of the Nepal Rastra Bank, the central bank of Nepal, has a clear-cut view of what needs to be done. "The country should develop and implement sustainable finance related policies for a better and safer financial system. These policies should not be detrimental to development activities, rather should guide the initiatives taken".
The report lays out some best practice solutions to overcome common challenges to developing and implementing sustainable finance frameworks. These include sensitizing financial institutions to convince them of the importance and benefits of a sustainable finance approach, building capacity through training of bank staff, knowledge sharing, and encouraging industry ownership of sustainable finance frameworks.
It also offers lessons learned in four priority areas which connect sustainable finance with broader development ambitions. These include environmental and social risk management (ESRM) by financial institutions, green finance, financial inclusion, and agriculture & SME finance.
Drawing on international resources and experience along with stakeholder engagement can help create the right policies.
The report also says outreach, communication, and education efforts should be coupled with efforts to increase financial literacy and awareness. Setting minimum investment targets or targeted credit schemes to promote green activities within the agricultural and SME sectors are also essential. .
It also identifies three key lessons for promoting green finance. They include planning broad stakeholder engagement to help create well-tailored policies, definitions, and standards; supporting banks with additional guidance to build capacity; and drawing on international support and resources where possible.
These recommendations can be applied by all emerging economies looking to develop sustainable finance frameworks and embed them in national financial systems.