GREEN finance is a new concept that China initially launched to improve environmental quality. Over the last two decades, environmental degradation has resulted from climate change and global warming. According to the World Bank and Asian Development Bank, every country has to reduce carbon dioxide emissions to achieve sustainable growth. In line with this argument, every government has formulated green banking policies to achieve a sustainable environment. As per this phenomenon, firms will borrow funds to invest in green technology and follow the necessary measures to make the environment clean. As a result, green banking guidelines were introduced by the State Bank of Pakistan (SBP) in 2017. Subsequently, every bank has formulated its green banking policy keeping its resources in view.
In Pakistan, the Green Finance Scheme has a track record of over five years (2017-2022); however, the success of this program is questionable. Currently, firms invest in solar energy using their cash resources instead of bank borrowing. More recently, a few banks advertised for solar financing in the wake of the high cost of electricity bills.
In terms of financing for renewable energy, SBP split financing into three categories: (a) projects with a capacity ranging between 1 MW and 50 MW may get funding for a maximum of 12 years including two years as a grace period (note: the maximum limit for financing is Rs. 6 billion), (b) electricity generation projects up to 1 MW may get maximum funding of 400 million for ten years with a grace period of three months and (c) for installing renewable energy projects up to 50 MW, financing is available up to Rs. 2 billion for ten years with a grace period of 6 months. The mark-up rate for all kinds of financing is up to 6 percent per annum. However, financing in renewable energy is quite low and firms are not utilizing the incentives offered by SBP to promote this sector.
In order to promote and encourage financing, marketing plays a pivotal role in showcasing different products offered by financial institutions and disseminating information among potential borrowers. However, banks are not highlighting green finance using communication channels. What is happening is that over 50% of news is political and no communication mode provides coverage for climate change issues or sustainable green finance to create familiarity among firms and individuals. Particular emphasis is needed to develop a strong narrative about sustainable green finance. Moreover, it is to be highlighted that a higher level of carbon emissions distorts environmental quality which in turn creates various health issues.
Financial institutions must develop green financial products and campaigns to create awareness using different communication networks. This course of action will help firms benefit from green finance and contribute towards sustainable development in the country. Generally speaking, everyone is liable to act as a corporate socially responsible citizen and take necessary measures to make the environment more sustainable. In addition, the government should highlight that households and firms are responsible for improving environmental health. Taking a broader perspective, there is a need for a conversation at the national level wherein every citizen is responsible for disposing of pollution at the designated places and firms should discard their industrial wastage in an environmental-friendly manner.
When a bank receives an application for green finance, they are responsible for assessing the applicant’s eligibility, while being cognizant of their due diligent responsibilities and environmental risk mechanisms. For the purpose of uniformity, both documents covering due diligence and environmental risk rating must be standardized so that all banks follow the same standards. The limit of greenhouse gas (GHG) emissions should also be set to control a firm’s contribution to environmental degradation. Moreover, the limit may be aligned with the Environmental, Social, and Governance (ESG) framework and must be connected with due diligence and environmental risk rating system for better evaluation.
Over the last year, loan pricing has increased substantially, discouraging borrowers. In this regard, the SBP should offer concessional interest rates to promote environment-friendly practices. The government has introduced solar panels and motivated people to shift to using alternative, environmentally friendly, means to generate electricity. Through this, the electricity produced by solar panels can be sold back to WAPDA, benefiting both parties. Through this process, the banks can take advantage of financing solar projects as they can recover the cost and generate profits. By investing in solar power projects, banks can attain the goal of reducing GHG emissions and eradicating the need for new coal businesses. It is argued that solar power is a promising investment opportunity for green finance projects.
Regarding the other impediments, the adoption of energy is an important issue. If the government wants to promote a specific sector, it must offer some incentives to make the particular investment viable. For instance, tax holidays, zero importation duty on heavy machinery, availability of land and other utilities, etc. may create more opportunities to improve this sector and help achieve a sustainable economy. On the demand front, the lack of awareness is critical as firms and individuals are not focused on investing in solar power due to its higher price which causes an affordability issue. Thus, acceptability of new technology is difficult in the absence of proper information and understanding. Currently, the budget allocation and IMF policies may limit the growth of the solar sector.
To examine the viability of projects, banks may analyze repayment behavior, credit history, market credibility, size of business and cost and benefit analysis which will minimize the possibility of default. However, a potential problem arises in how banks can examine the GHG emissions produced by a firm. To capture this information on emissions, the banks must train their employees or hire professionals who will investigate the magnitude of GHG emissions produced over the years. This is especially the case when firms issue long-term loans. In case of violating the terms of financing, banks have to charge penalties which will keep pressure on firms to utilize their resources to minimize their level of emissions produced. On the other hand, most firms don’t have the capacity to reduce their emissions. If they do so, their cost will increase which is the biggest obstacle confronting green finance. However, the continuous efforts of the banks will help achieve sustainable green finance.
—The writer is an Associate Professor at the School of Social Sciences and Humanities, National University of Sciences and Technology (NUST), Islamabad.
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