Sustainable Finance News Letter

February 2024

New Reporting that will Impact Corporations and FIs

In our earlier newsletter, we addressed Bangladesh Bank Circular SFD 06 dated 26 December 2023 – Guideline on Sustainability and Climate-related Financial Disclosure starting in 2024. It requires banks in Bangladesh to implement reporting now being adopted globally starting with submitting reports to Bangladesh Bank.? The guidelines follow accounting standards IFRS S1 & IFRS S2 which incorporate TCFD recommendations.

TNFD (Taskforce on Nature-Related Financial Disclosures), a close relative of TCFD is now starting to be adopted globally and it represents the next step in financial reporting that corporations including FIs will adopt. Banks will be expected to assist in carrying out the TNFD’s mandate of supporting a systemic shift towards nature-positive outcomes. Ensuring financing is in line with the TNFD will eventually be another essential step and banks should use nature-related risks and opportunities as part of their investment and lending decision-making. For example, this could include credit analysts and fund managers considering the impact of a potential investment on sensitive ecosystems or contribution to land and water pollution. In extreme situations, banks choosing to ignore nature-related risks may see at-risk companies defaulting on loans. To prevent this from happening, banks can begin working with portfolio companies to ensure nature-related risks are incorporated into scenario analysis and their own strategy and risk management processes.?

While this is similar in approach to TCFD, it should be noted that the makeup of nature-related risks and opportunities will lead to the TNFD being inherently more complex than TCFD.? Nature-based impacts and risks interact with climate change through and are further shaped by social dimensions and development scenarios, giving rise to complex and interdependent nature-based risks.? I recall one banker from Bangladesh explaining the sad tale of Tiger Widows in Sundarbans: changes in climate impacting the natural habitat of tigers often forcing them to villages.? The encroachment in turn leads to a loss of an income source.

While regulatory changes are not immediately expected in Bangladesh, banks are advised to quickly build inhouse capacities with E&S management and policy units on assessing and managing nature related risks and opportunities.? This is due to physical risks that some industries are already experiencing (e.g., gradually loss of biodiversity that affects certain agricultural sectors or value chain associated with the agricultural sector).

While frameworks are largely still in development (incl. technical screening criteria similar to Bangladesh Bank’s Metrics and Targets reporting under SFD 06), TNFD recommendations already include recommendations for the identification of nature-related risks.

Actions that will impact the FI Sector in Bangladesh

Several DFIs (Developmental Financial Institutions) and MDBs (Multilateral Development Banks) have teamed up to provide funding for the Bangladesh Climate and Development Platform.

The actions are intended to support reforms to strengthen Bangladesh’s resilience to climate change, advance the decarbonization of the economy, and manage transition risks.? Much like new regulations and reporting requirements introduced by Bangladesh Bank with the same objectives of mitigating the impacts of climate change, the actions stemming from Bangladesh Climate and Development Platform will likely impact the way corporations and FIs conduct their business.?? The goals are to integrate climate and green dimensions into public procurement and public planning, incentivize locally-led climate actions, and scale up a national disaster risk financing strategy. Other reforms include adopting a periodic formula-based price adjustment mechanism for petroleum products, tackling air pollution and GHG emissions, enhancing the efficiency and resilience of water supply and sanitation services, and for Bangladesh Bank to update the Policy on Green Bond Financing.?

The Asian Development Bank (ADB), the World Bank, International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), Asian Infrastructure Investment Bank ( AIIB), Agence Fran?aise de Dévelopement (AFD), the European Union and the European Investment Bank (EIB), as part of Team Europe, the Green Climate Fund (GCF), the Government of South Korea, Japan International Cooperation Agency (JICA), and the United Kingdom jointly announced their intention to collaborate respectively towards the goals.

Significant amounts are allocated towards training but with regard to finance and blended finance, efforts will be made to, improve the bankability of priority projects.? In other words, makes climate projects more attractive for private sector banks to become involved. This will also support scalability to attract private investments across Bangladesh, mainstreaming projects in development plans while reducing the financial burden on the public sector. The ADB along with the World Bank are preparing this currently, which will enhance coordination jointly with other development partners.