Identifying the Financed Emissions Risks in Bangladesh’s Financial Sector
By Blake Goud and Dr. Eman Tabet
Summary
Bangladesh is the 7th most climate-vulnerable country in the world, despite contributing less than 5% of global greenhouse gas emissions (GHG). One in every seven people is expected to be displaced by 2050 due to the resulting increase in sea levels alone. This has long been a key driver of the country’s determination to build resilience to climate change impacts. Bangladesh depends significantly on foreign funds to achieve its climate-related goals. However, as emphasized during the COP26 talks, developed countries have been falling behind on their commitments to provide an annual US$100 billion to developing countries to help them combat climate change.
Bangladesh’s vulnerability to extreme weather events and changes in climate hits at the very core of its economy. As an agriculture-based economy, this sector also contributes substantially to the country’s total greenhouse gas emissions footprint, accounting for 45% of total emissions. This concentration of emissions within a sector which is in turn vulnerable to the impacts of climate change makes adaptation key for Bangladesh so that it can deal with the damage already done to the global climate. The vulnerability of Bangladesh’s economy to climate impacts that have yet to be felt also necessitates greater investment in adaptation, and not only a focus on mitigation.
Despite holding little more than a third of Bangladesh’s financial sector assets (38%), banks play a central role in greening the country’s financial sector as they contribute more than half (52%) of the directly financed emissions in the economy. The number grows drastically after accounting for indirect emissions (those related to utilities, transportation and waste management that are induced by the directly financed activities). Most of the direct emissions attributable to fixed-income instruments are connected to waste management, which becomes a source of indirect emissions linked to banking assets. Meanwhile, the equity market is responsible for a significant amount of other sources of emissions (direct and indirect) that are linked to the manufacturing sector. We take this to indicate a greater relevance for climate mitigation in manufacturing for equity investors than for banks.
The significant concentration of direct and indirect emissions within the banking sector shows the importance of measuring banks’ full exposure to climate-related financial risks. Based on our analysis, this includes not only the financed emissions risks directly embedded within their customers’ activities, but also indirect sources of emissions.
When examining the direct and indirect emissions of banks alone, the financed direct emissions are found to be especially concentrated in agriculture. However, when accounting for indirect emissions, the banking sector’s concentration in agriculture is lessened somewhat as emissions related to wholesale & retail trade, construction, and education, health, & other business grow in size.
From the household perspective, most financed emissions stem from residential properties, while about half are attributable to transport vehicles. The remaining third are linked to other household finance such as credit cards and personal loans. A majority of emissions from the residential property and transport vehicles sectors were financed by Islamic banks, while conventional banks were found to hold more financed emissions relating to personal loans and credit cards. Islamic banks‘ financing portfolios are more concentrated in urban areas, while conventional banks have a greater rural presence, which may account for some of the differences between their financing portfolios.
The Bangladesh government continues to encourage financial institutions to actively finance mitigation efforts against the significant climate vulnerabilities that the country and economy face. Looking forward, there is a need to align the comprehensive national efforts that the government has developed so far, including the recently announced Mujib Climate Prosperity Plan for 2021-2030, with international climate actions. As increasing pressure on developed countries to fulfill their pledged contributions leads to an increase in funding for developing countries, this will help Bangladesh to better finance adaptation and mitigation projects, and making these projects more bankable can help bring in additional funding.
In addition to international financial flows to support climate mitigation, the EU’s carbon border adjustment will impact Bangladesh as well. Although designed to have a lower impact on developing countries, it will still require companies, investors and financial institutions to find new ways to develop a low-carbon industrial base if the economy is to prosper.
Investors and companies deciding where to make new investments will have to consider a range of possible scenarios estimated using data inputs on emissions that are not always centrally collected. As a result, ‘order of magnitude estimates’ such as those presented in this report can provide an indication of where financed emissions risks are located today for investors and bankers. This provides a starting point for what is required in order for financial institutions, investors and companies to take action to become more resilient even if carbon border adjustments offer less accommodation for developing countries.
Recommendations
Based on our analysis, the report concludes with several recommendations that we believe are crucial for Bangladesh to take forward in its climate resilience journey. These are grouped into three themes:
Risk Management & Mitigation
Banks should adopt more systematic strategies to analyze their financed GHG emissions and should start with the tools provided by Bangladesh Bank.
Banks should also prepare to follow the principles for climate-related financial risk management laid out by the Basel Committee that are likely to underpin risk management and disclosure requirements in the future.
Investors, asset managers and asset owners should work to raise awareness of ESG benchmarks and reporting, especially among listed companies. This is particularly important for domestic investors since foreign asset ownership in equity markets is relatively low compared to countries covered by previous reports in this series.
Policy
The government should adopt policy changes to mandate financial institutions’ adoption of Environmental and Social Due Diligence Risk Assessment as well as public disclosure of material climate-related risks and strategies (e.g., incorporating the information provided using the Sustainable Financing Reporting template into banks’ Pillar 3 disclosures).
Following the COP26 and G7 meetings of 2021, where developed countries agreed to double funding for adaptation to at least US$40 billion by 2025,1 Bangladesh should prioritize and refocus its financial sector’s ability to support greater absorption, particularly for adaptation funding for all sectors to mitigate the physical impacts of climate-related risks.
Opportunities
Investors and financial institutions should enhance the bankability of climate adaptation measures within the agriculture sector, such as by deploying nature-based solutions that adapt to and mitigate future climate risks.
The manufacturing sector should be invested in to increase sustainability and adoption of lower-carbon technology and thus benefit from the favorable treatment likely during the implementation of the EU’s carbon border adjustment tariffs. Bangladesh has the chance to gain and solidify its market share by developing a more sustainable industrial sector.
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