Responsible bank: new dimension of green banking

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With the climax of climate change and its adverse effects, we are all concerned about our habitat, our economy, our way of life and future generations. The banking sector is not far from it. As societal expectations change, banks need to be transparent and precise about how their products and services create value for their customers, clients, investors and society.

In this context, the United Nations Environment Program for the Financial Initiative (UNEP FI) has taken a commendable initiative to change banking strategy by putting in place a framework called Responsible Banking Principle (PRB), which consists of six principles. These principles will help any bank to align its business strategy with the objectives of the company. The principles are:

Alignment: This principle will ensure that the business strategy is consistent with the needs of individuals and the goals of society, as expressed in the Sustainable Development Goals, the Paris Climate Agreement and relevant national and regional frameworks.

Impact and Definition of Objectives: Financial institutions will continually increase their positive impacts while reducing negative impacts and managing risks to people and the environment resulting from our activities, products and services.

Clients and Customers: Financial institutions will work responsibly with their clients and clients to encourage sustainable practices and enable economic activities that create shared prosperity for current and future generations.

Stakeholders: Financial institutions will proactively and responsibly consult, engage and partner with relevant stakeholders to achieve company goals.

Governance and Culture: Financial institutions will implement the commitments of UNEF FI members through effective governance processes, management systems and a responsible banking culture.

Transparency and Accountability: Financial institutions should periodically review the individual and collective implementation of these principles and be transparent and accountable for its positive and negative impacts and its contribution to societal objectives.

In short, the principles provide the framework for a sustainable banking system and help the industry demonstrate how it makes a positive contribution to society and the environment. These will accelerate the contribution of the banking sector to the achievement of societal objectives as expressed in the Sustainable Development Goals and the Paris Climate Agreement.

The Principles for Responsible Banking were launched by 130 banks in 49 countries, representing over $ 47 trillion in assets, at the United Nations Annual General Assembly in 2019. Over 45 CEOs, as well as the Secretary United Nations General, attended the launch ceremony. IDLC Finance Ltd, the only UNEP FI member from Bangladesh, has signed the PRB.

As we know, the government of Bangladesh has taken a proactive role in promoting sustainable banking practices and green lending through the central bank. The Bangladesh Bank released a dedicated Green Banking Policy for Banks and Non-Bank Financial Institutions in 2011 to take the initiative forward.

It set up a green refinancing program with low cost financing for eligible sectors and components, and issued a directive on environmental and social risk management (ESRM) for banks and non-banks which strongly encouraged the implementation of sustainable banking practices.

The ESRM directive is also a prudent measure to prevent financial institutions from financing projects that are negatively responsible for carbon emissions. In accordance with the Directive, each manufacturing company within the framework of the financing of large and medium-sized enterprises and the manufacturing companies selected by sector within the framework of the financing of small businesses require environmental and social due diligence.

Under the regulations, the BB has set a disbursement target of 5% for green loans and 20% for sustainable financing to banks and financial institutions of their annual disbursement.

Banks are also required to submit quarterly reports on their individual green and sustainable finance. The BB recently published its list of the best banks and NBFI under the 2020 sustainability rating. This will also encourage financial institutions to increase their participation in sustainable or responsible banking practices. In truth, all of these government initiatives aim to develop a green economy as part of the broader SDG agenda.

Carbon emissions are one of the main driving forces negatively impacting the climate and increasing its temperature. In order to mitigate this and protect the environment from further adversities, organizations like the UNEP FI have been very steadfast.

UNEF FI has launched another initiative as part of the Net Zero Banking Alliance (carbon neutral economy by 2050) for banks / FIs to take a step forward towards a better and sustainable future. IDLC became a proud signatory member of this initiative in 2021 and is working diligently on setting smart targets to reduce carbon emissions.

Now the banking sector must show its strong commitment and actions to increase the movement. Without a doubt, green finance can be an alternative financing opportunity. Some banks and financial institutions have set up a partial green portfolio and are building a sustainable global portfolio on the demand and need for a sustainable economy. Our banks must be very focused on this issue and must define their own vision of sustainability.

The author is the business manager at IDLC Finance Ltd.


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