Before pondering over any questions related to green finance, it is important to explore the background about what has happened during the past three decades in this field. Ecological inequality has produced emissions of carbon dioxide and greenhouse gases in an imbalanced manner. This has created various environmental issues. This ecological inequality is believed to be the result of rapid industrialisation across the world especially with reference to heavy industrial zones of a varied nature. Pakistan has also witnessed various environmental issues because of its growing population, unplanned urbanisation, intensive energy consumption in the presence of lower production form of transformational technologies and poor waste management. These environment and climate issues are also causing serious health problems; including air pollution and lack of availability of hygienic water. Such risks — which are increasing — are getting bigger in the absence of precautionary measures taken by the concerned authorities.
In terms of minimising the impact of all the above issues and to improve individual quality of life, the concept of green finance was initially introduced in the United Kingdom in 2009. Firms fulfilling the requirements associated with safeguarding the environment obtained funds from banks and DFIs which were referred to as green financing. This state of financing helped reduce the emission of carbon dioxide and other greenhouse gases. In pursuit of these useful financing modes, the regulators of other developed countries focused on these developments with a view to formulate green banking policies, in a more effective and efficient way for achieving the desired results within their countries.
To move closer to international standards, the State Bank of Pakistan (SBP) issued Green Banking guidelines in October 2017. Consequently, the minimum guidelines were issued chiefly centering around and emphasising the role of financial institutions in fulfilling their responsibilities through provisioning financing to transform the economy into a climate resilient and resource efficient one. The broad objectives include: (a) the development of green banking policies, (b) the adaptation of financial mechanisms that can allow banks/DFIs to finance in environment friendly industrial sectors, (c) the incorporate green banking practices in an internal control framework, and (d) the introduction of green exposure limits, which would entail budgets with exposure limits on all those industries paving ways for hazardous environment.
Insofar as the green finance emphasizes bringing in “green technology” it requires a huge investment in new projects, which would restrict the amount of capital projects that could be considered green
In order to apply the above guidelines, a question arises as to what aspect does green banking promote financing in Pakistan or is the concept of green banking even a helpful tool to use to mitigate such environmental hazards to a minimum level? To make the economy green, borrowers can obtain financing from the banks with a view to meet the requisite conditions outlined to make ecological improvements or at least to not harm the environment. The movement towards a robust green banking program in Pakistan is still in its infancy and it is going to be challenging for both the lenders (supply-side) and borrowers (demand-side) to implement green policies due to the lack of the desired expertise in this developing industry.
Explicitly, the supply-side refers to banks and DFIs that may formulate their green policies to evaluate the demand-side (borrowers) to determine if they comply with the green financing requirements. To this end, various concerns may be registered. Primarily, these organisations are operating at an infancy stage and are working to develop green banking policies. Secondly, from a developmental perspective, the banks will have to ascertain how the green finance mechanism will apply to all banks and DFIs in the implementation phase of green financing (i.e. whether in full forms of disclosure or partial within the phases). Thirdly, the financial institutions may have to build the required capacity to monitor the industrial projects over the life of financing. Moreover, to evaluate whether or not a business is meeting the environmental regulations. Fourthly, financial institutions may hire experts to monitor and assess the financing proposals thereby resulting in increases in the costs that banks incur. Lastly, green banking policies aim to raise funds under different financing instruments (green IPOs and green bonds) for which the method of raising capital is yet to be fully articulated.
The demand-side of the equation suggests that existing but potential borrowers may follow the terms of the new financing scheme to promote a green environment. To obtain funds by an alternative segment of green finance, various issues are to be kept in mind. First of all, insofar as the green finance emphasizes bringing in “green technology” it requires a huge investment in new projects, which would restrict the amount of capital projects that could be considered green. Secondly, to understand and apply the new schema of financing, firms will have to obtain the expertise of professionals to help the firms to comply with the regulations both in obtaining funds and the utilization thereof in a judicious way. Thirdly, on account of varied business dynamics over a period of time, especially in case of a decline in business activities, it may be challenging for the firms to recoup any loss in their capital investments in absence of the guidelines in the provisions of green finance that explicitly deal with these issues. Fourthly, in terms of nature and size of industrial units, it is important to determine how smaller firms may be able to participate in the green financing movement because their resources may be limited. Last, but not least, the majority of the firms do not have complete understanding of green banking policies. SBP, being the regulator, has to organize and conduct workshops about the current design and state of green policies.
Under the present circumstances, it’s going to take a substantial amount of time and effort to promote financing under green policies. However, both the supply- and demand-side of green finance may take the necessary measures to promote a green and sustainable economy. Other stakeholders like the Ministry of Environment, the Ministry of Law, and the SBP need to ensure that the rules associated with green banking are implemented in a true spirit of the law. Similarly, the role of financial institutions in developing green banking policies is to evaluate borrowers to promote green banking and establish products that meet the buyers financing needs. Over time, it is hoped that green finance will help society to improve the environment and to reduce ecological inequality.
The writer is associated with the School of Social Sciences and Humanities, National University of Sciences & Technology, Islamabad
Published in Daily Times, March 16th 2019.