Since the issuance of the Green Banking Guideline in 2017 by the State Bank of Pakistan (SBP), the scale and scope of these guidelines have not been defined to develop a climate-resilient economy. Despite contributing less than 0.03% of the global emissions, yet Pakistan is among the top 10 countries highly under risk to the negative impacts of climate change. The green financing mechanisms are being considered as way-out to deal with these challenges, globally. Green financing refers to eco-friendly business activities and energy-efficient industries preferably financed by banks.
The literature about State Bank of Pakistan (SBP) guidelines witnessed more about environment-friendly operations of the banking sectors rather than the broader context of investment in major sectors of the economy such as industry, transport, construction and agriculture sectors. Green financing means adding value to service delivery to protect the natural environment. The International Energy Agency, however, suggest that around $1 trillion per year in the low carbon economy needs to be invested to help protect the environment and combating climate change. Whereas,the World Economic Forum considered an investment of $700 billion per year globally in clean energy, transportation, and forestry sectors.
It is worth considering the fact that the economic activities in all sectors of the economy heavily depends on the availability of reliable energy sources. So, looking for viable green financing channels/ opportunities to develop green markets, businesses and investments in energy efficiency projects and clean energy cannot be ignored.
Pakistan’s economy is facing three critical challenges i.e. climate change, energy, and fiscal crisis. Without understanding the energy-economy and environmental nexus, it would be useless to define the scope of green financing in Pakistan. The total budget outlay of Pakistan for 2018-19 was around Rs. ˜5.9 trillion, out of which Rs. ˜3.7 trillion accounts for the energy sector. As Pakistan’s power sector has struck with a circular debt of Rs. 1.9 trillion by December 2019 , largely due to high system losses of the energy distribution companies and use of imported fossil fuel i.e. imported oil contributed 40% of the primary energy use in 2019 in Pakistan. This reflects the high cost of energy in Pakistan. At the same time, the plan to decarbonize the energy system and to fulfill Pakistan’sNationally Determined Contributions (NDC) commitment of 20% reduction in Green House Gas (GHG) emissions (from business as usual) by 2030 could not be achieved under the current energy mix.
The policy maker must realize that without improving the current energy mix, Pakistan could not achieve the climate change mitigation targets under the global commitments, whereas, sustainable economic growth would remain a distant dream
The policy maker must realize that without improving the current energy mix, Pakistan could not achieve the climate change mitigation targets under the global commitments, whereas, sustainable economic growth would remain a distant dream. In December 2019, the Planning Commission of Pakistan and UNDP jointly launched sustainable energy for all (SE4ALL) national action planof Pakistan. It sets energy access, renewable energy, and energy efficiency targets of Pakistan by 2030. In total, it was estimated that the energy sector offers an investment potential of $67.48 billion to achieve the SE4All objectives in Pakistan. Similarly, the energy efficiency projects would save 15-20% of the primary energy supply in Pakistan by 2030 if implemented.In monetary terms, there is an investment potential of $ 18 billion in energy efficiency by 2030 . All these projects fall under eco-friendly investments.
With such a huge investment potential in green finance in Pakistan, SBP has not been able to implement green banking guidelines, yet. The banks and financial institutions were given a year to implement green banking guidelines. It is time to rationalize the scale and scope of the green banking guidelines, starting from energy sector investment projects to grassroots level SMEs establishment. SBP needs to take on board the Ministry of Energy, Ministry of Climate Change, Ministry of Law and Justice and various other national and international stakeholders to operationalize green policies.
To align the scope of these guidelines with the National targets of climate change mitigation and use of clean energy, it is necessary to consider the facts as stated above. In road to green financingin Pakistan,Electric Vehicle Policy, standardization of home appliances, building codes for construction industry particularly Naya Pakistan housing scheme and improvement of the industrial process are the avenues to redefine and broaden the scope of these guidelines. At the grassroots level to promote SMEs in Pakistan, revolving loan funds should be designed under these green banking guidelines.
Above all, SBP cannot implement green banking guidelines in the above-mentioned areas until and unless, it addresses the challenges posed by policy externalities i.e. credit risk management, retaining green market competitiveness, financial sector regulatory alignment of commercial banks, lack of capacity and skilled team.
The writer is a public policy analyst based in Islamabad