Access to Green Finance Improves Compliance with Environmental Regulations in Bangladesh
By Nabil Haque
Over the last three decades, rapid industrialization and its ensuing pollution have led to a significant decline in environmental quality in Bangladesh. A 2023 report from the World Bank reveals the dire situation of water pollution in Bangladesh, with heavy metal and chemical pollution having far-reaching impacts on not only water supply but also agriculture and other industries.
In the same report published five years prior, the World Bank noted that the economic growth Bangladesh was experiencing, characterized by uncontrolled industrialization, was happening with inadequate pollution control. Bangladesh now is working to reverse this trend with national environmental regulations, but results are mixed.
Despite compliance with regulations improving in recent years, the sheer number of polluters to regulate has laid bare institutional weaknesses. For example, it was reported in 2020 that more than 5.7 million gallons of liquid waste were dumped into the four rivers surrounding Dhaka, making them ‘biologically dead’ for a five-month period.
Given this, it is paradoxical that Bangladesh simultaneously hosts many of the greenest factories in the world, as measured by the number of establishments certified for Leadership in Energy and Environmental Design (LEED) by the US Green Building Council (USGBC). Bangladesh has 214 LEED green factories, which include 80 platinum-rated and 120 gold rated, and on a separate count, Bangladesh hosts 54 of the world’s top 100-ranked factories.
In a new study published in the Journal for Cleaner Production, my co-author, Sungida Rashid, and I explore the connections between these paradoxical trends observed in Bangladesh. Using Structural Equation Modeling (SEM) on data provided in Department of Environment (DoE) annual reports and other sources, this article investigates how attributes of the regulatory agency 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 banks’ and financial institutions’ lending to projects promoting usage of 68 specifically listed green technology, products and/or initiatives.
We found that access to green finance, which the Bangladesh Bank has mandated over the last decade, significantly affects the adoption of treatment plants as well as LEED certification. We also found that fines for non-compliance do not significantly influence the adoption of wastewater treatment plants. This is attributed to weak enforcement and the ability of large polluting factories to influence regulatory decisions. Additional treatment plant adoption did not significantly increase exports but possession of voluntary certifications significantly increased exports.
Environmental regulation troubles
In 1997, the DoE passed regulations that made it mandatory for certain factories to operate wastewater treatment plants, which includes major export-oriented sectors such as textiles, tanneries, paper and beverage manufacturing, and pharmaceutical productions. However, polluting factories often do not adopt and operate wastewater treatment plants, and several studies have identified a lack of regulatory capacity for oversight, finance and know-how as major reasons for non-compliance.
Although the human resource limitation of the DoE is widely known, recent literature has also identified the arbitrary nature of financial penalties for pollution, which are also not collected fully. The arbitrariness results from fines not commensurate with the magnitude of the environmental offense, and repeat offenders being penalized the same, thereby creating low deterrence. This low state capacity has contributed to poor governance when it comes to providing the public good of better environmental quality.
Policy implications
Our research suggests that increasing the capacity of the DoE, both in terms of human resources and technical capabilities, is crucial for improving environmental compliance. The insights from this analysis can benefit two multilateral initiatives in strengthening the DoE.
First, in December 2022, the World Bank launched a $250 million project called Bangladesh Environmental Sustainability and Transformation (BEST) with the objective of strengthening environmental governance and reducing pollution discharge from key sources. Through this project, more than 900 staff will be recruited based on a new organization structure and environmental cadre for improved DoE infrastructure. Second, the Asian Development Bank also approved the Climate-Resilient Inclusive Development Program with conditions that stipulate arresting water pollution and drafting an enforcement guideline for clarifying penalties for pollution and the roles of polluters and environmental courts.
It remains to be seen whether these one-off projects model external interventions that can increase a regulatory agency’s workforce and its capacity beyond the project. While the availability of green finance seems to be on the right track for Bangladesh and will get a boost due to multiple multilateral initiatives, weak environmental enforcement gives 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 scaling up green finance are therefore essential steps towards improving environmental performance in Bangladesh. Aside from loans, providing credit guarantees or insurance for smaller factories that face difficulties obtaining loans can also enhance green investments. A recent World Bank report also recommends building skills and expertise on green financing across sectors, from experts in government agencies to financial institutions, private businesses and even students to boost institutional and borrower capabilities.
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