For financing climate-and environment-friendly sustainable-development projects, green bond is a popular tool across the world. Introduced by the European Investment Bank in 2007 and followed by the Word Bank in 2008, the green bond now boasts a market size of US$1.60 trillion. Green bond is similar to regular bonds of fixed-income debt instruments with a critical difference.It is that the fund raised by issuing a green bond has to be used to finance projects that have a positive impact on the environment.
Thus, a green bond is designed to support specific climate-related or environmental projects and may come with tax incentives to attract investors. Though the term 'green bond' is often used interchangeably with 'climate bond' or 'sustainable bond,' there are some differences in these three categories of bonds. Green bond is a broader concept whereas climate bond is 'specifically finance projects that reduce carbon emissions or alleviate the effects of climate change.'
Data compiled by Climate Bonds Initiatives, an international organisation working to mobilise global capital for climate action, show that 80 countries have issued 9886 green bonds up till the end of 2021. It means half of the countries in the world have yet to float any green bond.
Bangladesh is a late-comer in this arena of finance. So far, two green bonds have been issued by one non-government entity and one government body. The first one was issued in 2021 by Sajid Foundation, an NGO, for fundraising through the Green Zero-Coupon Bond worth Tk 1.0 billion. The goal is to enhance the outreach of its microcredit programme and ensure environmental development. Second one is Beximco Green-Sukuk Al Istisna worth Tk 30.0 billion, also issued last year. The funds generated from the bond will be spent on installing two solar power plants and also expansion of a textile unit.
To make the green-bond issuance and management efficient, Bangladesh Bank finally published a 'Policy on Green Bond Financing for Banks and FIs' in the past month. By publishing the policy, the central bank has completed another critical step to make the green financing effective. More than a decade ago, in 2011 to be exact, the central bank issued the Green Banking Policy Guidelines. It was the first significant measure encouraging banks and financial institutions to invest in environment-friendly projects along with adopting green measures.
The policy on green-bond financing is important for various reasons. First, it will guide the banks and financial institutions to select and invest in right projects. Banks will not invest in any project that has some elements of environment or climate in name only, but is not really a green or climate-friendly one. Second, it will help the entrepreneurs and state entities to design their green projects carefully. They will avoid packaging any project by adding some components of environment or sustainability to generate fund for other purpose. Third, it will support the government in dealing with climate-change problems.
The policy defines green bond as 'a long-term fixed-income securities/instrument to finance or refinance projects or activities which are recognized as green under the Green Bond Taxonomy stipulated in this policy.' The central bank's policy document outlined eight broad sectors under the green-bond taxonomy. These are (i) low-carbon electricity, heating and cooling (ii) green establishments and built environment (iii) energy and resource efficiency in industry (iv) low-carbon transportation (v) circular economy, wastewater, and water management (vi) agriculture and land use (vii) activities to enhance climate resilience not elsewhere classified and (vii) services to support the low-carbon, climate-resilient and green economy. The classification is exhaustive, though overlapping in some cases.
Notably, the green- bond taxonomy is 'a classification of economic activities based on some environment-related standardised thresholds that are consistent with the goal of creating a low-carbon, climate- resilient and green economy that might be financed through issuing green bonds.
The policy document also outlined procedure of green- bond issuance as well as financing by banks and FIs. In this connection, it has also set a number of eligibility criteria and stressed assessment, verification and certification as well as monitoring, reporting, disclosure and rating.
Bangladesh Securities and Exchange Commission (BSEC), another key regulator of the country's financial sector, has a critical role to make the green bond effective. In fact, banks and financial institutions have to get approval from the BSEC, fulfilling the requirements set by the regulator. BSEC has already defined green bond as debt securities or Islamic Shariah- based Securities (IBS) or Asset Backed Securities (ABS) provided that the money or proceeds of this bond is for investing in a project or company or organisation to make a quantifiable and beneficial impact on climate or environmental.
The policy document also provides a matrix of taxonomy of green activities in eight sectors in the form of activity, definition and criteria for green bond. The details will help clarify many questions regarding the selection of eligible sector or area for green bond. For instance, under the low-carbon transport sector, green bond for passenger rail transport can be issued if the trains and passenger coaches have exhaust emissions of less than [50g] CO2e per passenger km; or the passenger transport services are intended to allow a reduction in emissions of [30 per cent] on a passenger-km basis compared to a baseline (i.e. relevant alternative mode of transport in Bangladesh).
As Bangladesh is vulnerable to global warming and climate change, the country needs rigorous measures to address the issues. Green financing through green bond will be a handy instrument in this regard. As the policy is now in place, it needs proper implementation to overcome the challenges of climate change successfully.
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