Access to Green Finance Improves Environmental Compliance in Bangladesh

Boalkhali, Bangladesh. Photo by Sharafat Siddiqui via Unsplash.

By Nabil Haque

Over the past three decades, rapid industrialization and the resulting pollution have led to a significant deterioration of the environmental quality in Bangladesh. A 2023 World Bank report reveals the dire situation of water pollution in Bangladesh, with heavy metal and chemical pollution having far-reaching effects not only on water supply but also on agriculture and other industries.

In the same report published five years earlier, the World Bank noted that the economic growth that Bangladesh experienced, characterized by uncontrolled industrialization, occurred with inadequate pollution controls. Bangladesh is currently working to reverse this trend through national environmental regulations, but the results are mixed.

Despite improved compliance in recent years, the sheer number of polluters to regulate has exposed institutional weaknesses. In 2020, for example, it was reported that more than 5.7 million gallons of liquid waste were dumped into four rivers surrounding Dhaka, rendering them “biologically dead” for five months.

Given this, it is a paradox that Bangladesh is also home to some of the world’s greenest factories, as measured by the number of plants certified by the US Green Building Council (USGBC) for Leadership in Energy and Environmental Design (LEED). Bangladesh has 214 LEED green factories, including 80 platinum-rated and 120 gold-rated, and in a separate ranking, Bangladesh hosts 54 of the world’s top 100 factories.

IN new study published in Cleaner Production Journal, my co-author, Sungida Rashid and I explore the links between these paradoxical trends observed in Bangladesh. Using structural equation modeling (SEM) on data provided in annual reports from the Department of Environment (DoE) and other sources, this article examines how regulatory agency attributes combine with market aspects (e.g., access to green finance and export volume) to influence the adoption of mandatory wastewater treatment plants and voluntary certifications. Here, green finance refers to loans made by banks and financial institutions to projects that promote the use of 68 specifically listed green technologies, products, and/or initiatives.

We found that access to green finance, which the Bangladesh Bank has mandated over the past decade, significantly affects the adoption of WWTPs, as well as LEED certification. We also found that fines for noncompliance do not have a significant effect on the adoption of WWTPs. This is attributed to weak enforcement and the ability of large polluting factories to influence regulatory decisions. Additional adoption of WWTPs did not significantly increase exports, but having voluntary certifications significantly increased exports.

Problems with environmental regulations

In 1997, the DoE passed regulations requiring certain factories to operate wastewater treatment plants, which includes major export-oriented sectors such as textiles, tanneries, paper and beverages, and pharmaceuticals. However, polluting factories often fail to adopt and operate wastewater treatment plants, and several studies have identified a lack of regulatory capacity in terms of supervision, finance, and know-how as the main reasons for non-compliance.

Although the DoE’s staffing limitations are well-known, recent literature has also identified the arbitrary nature of financial penalties for pollution, which are also not fully collected. The arbitrariness results from fines that are disproportionate to the scale of the environmental offence, and repeat offenders are punished in the same way, resulting in low deterrence. This low state capacity has contributed to poor governance in terms of delivering the public good of improved environmental quality.

Political consequences

Our research suggests that increasing DoE capacity, both in terms of human resources and technical capabilities, is key to improving environmental compliance. The findings of this analysis could benefit two multilateral initiatives to strengthen DoE.

First, in December 2022, the World Bank launched a $250 million project called Bangladesh Environmental Sustainability and Transformation (BEST) to strengthen environmental governance and reduce emissions from key sources. The project will hire over 900 staff based on a new organizational structure and environmental staff to improve DoE infrastructure. Second, the Asian Development Bank has also approved a Climate-Resilient Inclusive Development Program with conditions that include stopping water pollution and developing enforcement guidelines to clarify pollution penalties and the role of polluters and environmental courts.

The question remains whether these one-time projects provide a model for external interventions that can increase the regulatory agency’s manpower and capacity beyond the project. While the availability of green finance seems to be on track for Bangladesh and will be strengthened by a number of multilateral initiatives, weak enforcement of environmental regulations provides limited incentives for polluting industries to make green investments and improve environmental performance using new green financial services.

Strengthening the capacity of regulatory agencies and increasing green finance are therefore essential steps towards improving environmental performance in Bangladesh. In addition to loans, providing credit guarantees or insurance to smaller factories that have difficulty obtaining loans can also boost green investment. A recent World Bank report also recommends building skills and expertise in green finance across sectors, from experts in government agencies to financial institutions, private companies and even students, to increase the capacity of institutions and borrowers.

Read the article in the magazine

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