A green economy is necessary to address pressing environmental challenges like climate change by promoting sustainable economic practices. Many banks are offering green loans to support projects with a clear environmental benefit. You! takes a look…
Climate change is more than an increase in temperature. It also includes sea level rise, changes in weather patterns like drought and flooding. Things that we depend upon and value - water, energy, transportation, wildlife, agriculture, ecosystems, and human health - are experiencing the effects of a changing climate.
Climate change significantly impacts the economy by causing more frequent and intense extreme weather events like floods, droughts, heat waves, which damage infrastructure, disrupt supply chains, reduce agricultural productivity, and increase insurance costs, ultimately leading to economic losses and hindering economic growth; particularly affecting sectors reliant on natural resources like agriculture and tourism, while also creating potential costs for adaptation and mitigation measures.
Heat waves and devastating floods during the last couple of years are a reminder that climate change-induced disasters can significantly set back Pakistan’s development ambitions and its ability to reduce poverty. These disasters have caused more than 1,700 deaths and displaced more than 8 million people. The damage to infrastructure, assets, crops, and livestock has also been massive, with more than $30 billion in damages and economic losses. Being an agro-based country, low agricultural productivity translates into lesser economic output for the country. The impact of the floods in Pakistan due to climate change exacerbated the already existing inequalities, revealing serious differences in safety, education, decision-making and employment.
Why green economy…
A green economy is an economy that aims at reducing environmental risks and ecological scarcities, and that aims for sustainable development without degrading the environment.
A green economy is necessary to address pressing environmental challenges like climate change, resource depletion, and biodiversity loss by promoting sustainable economic practices that minimise environmental impact, allowing for economic growth while protecting the planet for future generations; this includes transitioning to renewable energy source, reducing carbon emissions, and prioritising resource efficiency, ultimately contributing to a healthier planet and improved quality of life for people globally.
The UN defines the green economy as “low carbon, resource efficient and socially inclusive. In a green economy, growth in employment and income are driven by public and private investment into such economic activities, infrastructure and assets that allow reduced carbon emissions and pollution, enhanced energy and resource efficiency, and prevention of the loss of biodiversity and ecosystem services.”
One of the key benefits of a green economy is its ability to reduce carbon emissions. By shifting from fossil fuels to renewable energy such as solar, wind and water, we can reduce our global carbon footprint and slow down the rate of climate change. On the social front, the green economy promotes health and well-being by reducing environmental hazards and pollution, which have direct positive impacts on public health.
What is green finance?
Green financing, also known as sustainable finance, is a way to invest in environmentally-friendly projects. At its simplest, green finance is any structured financial activity – a product or service – that has been created to ensure a better environmental outcome. It includes an array of loans, debt mechanisms and investments that are used to encourage the development of green projects or minimise the impact on the climate of more regular projects. Or a combination of both.
One of the earliest forms of green finance was the issuance of green bonds, which are designated for funding environmentally friendly projects. The first green bond was issued by the European Investment Bank in 2007. It was called the Climate Awareness Bond (CAB). It was issued to demonstrate the EIB’s commitment to energy efficiency and renewable energy and to provide investors with a transparent link between climate funding and lending. As part of this big wave, many Asian companies and governments have actively issued green bonds in the past few years to finance the transition into greener technology and infrastructure.
For the United Nations, green financing plays an important role in delivering several of its Sustainable Development Goals. Its environment team is already working with public and private sector organisations in an attempt to align international financial systems to the sustainable development agenda. Some of the activities UN Environment is involved in include helping countries re-engineer their regulatory frameworks – so that green borrowing becomes compliant.
Climate finance is a type of green finance, which is a broader term that includes all financial activities that support environmental sustainability. Climate financing encompasses funds directed towards projects and strategies designed to tackle climate change. This includes both reducing emissions and adapting to its impacts.
Banking and financing the way we know it now, started in 15th century in Italy. In 1992, UN introduced an environmental programme financial initiative. The purpose was to link sustainability and financial performance. After that there have been number of frameworks, guidelines and initiatives on sustainability across the globe.
The objective of Green Banking Guidelines (GBG) is to reduce vulnerability of banks from risks arising from environment, fulfill their responsibilities for the protection of environment and provide finance to transform the economy into a resource efficient and climate resilient one. While the primary responsibility of ensuring compliance with environmental laws and regulations rests with the borrowers, banks are encouraged to put in place appropriate mechanisms to identify, assess and mitigate environmental risks and, thereby, prevent undue financial losses.
Role of financial institutions
The financial sector has an important role to play in the fight against climate change by supporting reductions in climate change risk and mitigating the impact of adverse climate events. The financial institutions demonstrate a significant part in boosting the renewable energy sector in the country. Many banks are offering green loans to support projects with a clear environmental benefit. A good example for green financial products can be an auto-loan that can be used to purchase electric or hybrid vehicles which emit zero or significantly less greenhouse gases compared to vehicles with a combustion engine.
Green banking is similar to the concept of ethical banking, which starts with the aim of protecting the environment, as it involves promoting environmental and social responsibility while providing excellent banking services. The State Bank of Pakistan defined green banking as promoting environmentally friendly practices that aid banks and customers in reducing their carbon footprints. Green banking can also be called social or responsible banking because it covers the social responsibility of banks towards environmental protection, illustrating that social issues often intersect with environmental issues.
The State Bank of Pakistan (SBP) has actively contributed to promoting environmental sustainability through the implementation of the ‘Incentive Scheme for Renewable Energy’ (ISRE). Since 2016, financial institutions, including banks and development financial institutions (DFIs), have been actively involved in financing renewable energy projects through ISRE.
“A comprehensive analysis of financing in the energy sector projects in Pakistan reveals the significant contributions made by the World Bank and the International Finance Corporation (IFC) over the past four years. Specifically, these institutions have been actively providing financing to projects in the hydropower and renewable energy sectors from 2019 to 2022. It is noteworthy that the financing from these institutions also includes initiatives aimed at improving energy accessibility and capacity building,” says a detailed report ‘Energy Finance Outlook 2023’, compiled by Indus Consortium (an NGO based in Islamabad) and NED (University of Engineering and Technology).
Amid pressing challenges of climate change and growing concerns over energy sustainability, Indus Consortium recently hosted an impactful event titled ‘Banking on Renewables’ in Karachi. The gathering brought together prominent stakeholders, including banking sector professionals, civil society organisations (CSOs), environmental experts, and community representatives to discuss sustainable financing practices and energy transition strategies.
The event highlighted the critical role of financial institutions in mitigating environmental risks and promoting low-carbon economic growth. It explored the State Bank of Pakistan’s (SBP) initiatives, such as the Green Banking Guidelines (GBGs), Environmental and Social Risk Management (ESRM) frameworks and Green Taxonomy. However, speakers emphasised the need for overcoming implementation barriers, including insufficient technical expertise and varying compliance levels across the banking sector.
Liaqat Ali, Chairman Indus Consortium, inaugurated the event with opening remarks, underscoring the importance of fostering public-private partnerships to advance renewable energy solutions. He called upon financial institutions to actively support the ongoing solar energy boom in Pakistan, highlighting its potential to reduce dependency on fossil fuels.
The first session focused on sustainable finance, with a panel moderated by Ms Laila Nisar. Panellists, including Zarak Khan, Deputy Director SME Housing and Sustainable Finance Department, State Bank of Pakistan; Rashid Azeem, Head ESG United Bank Limited; Ms Sadia Bukhari, EVP/Head Risk Management Division and Chief Green Banking Officer, Sindh Bank Ltd.; Wajih Zaman, Head of Operational Risk, Green Banking, Soneri Bank Ltd; Muhammad Mustafa Amjad, Director Programmes Renewable First; Dr Khalid Waleed, Research Fellow, Sustainable Development Policy Institute, and Dr Raza Ali Khan, Former Chairman, Dept. of Economics and Management Sciences, NED University of Engineering and Technology explored strategies for enhancing ESRM implementation. They said that the implementation of the Green Banking Guidelines was slow, but the process would be swifter under the green taxonomy regime in the coming days.
Panellists said that there were some challenges in the implementation of these mechanisms as private banks had not formulated their own guidelines. The event ended on a positive note, with environmental experts emphasising the significance of engaging communities and CSOs to ensure equitable access to green financing.
To put it in a nutshell, the transition to a green economy is seen as a key strategy for achieving sustainable development and balancing economic growth.
Erum Noor Muzaffar is the editor of You! Magazine. She can be reached at iram29@hotmail.com
