Webinar – Sustainability Disclosure Updates from Emerging Markets – Wednesday, 13 July 2022

Bangladesh – Awareness raising, capacity building, monitoring, and enforcement to ensure regulator-driven ESRM implementation

Bangladesh Bank’s approach to helping banks and financial institutions implement ESRM has been developed and refined over the last decade.

In 2009, Bangladesh Bank worked with IFC to draft Environmental Risk Management (ERM) Guidelines after consulting with banks and financial institutions. The Guidelines were launched in 2011 and directed financial institutions to integrate environmental risk management into their credit risk management procedures. Following changing policy priorities, for example as a result of the 2013 Rana Plaza disaster and Bangladesh’s commitments to the Sustainable Development Goals, Bangladesh Bank sought support from IFC to update the ERM Guidelines. After rigorous multi-stakeholder consultation, the social dimension was added and the updated Environmental and Social Risk Management (ESRM) Guidelines were launched in 2017, replacing the ERM Guidelines. In addition to incorporating social risk into banks’ risk management, the ESRM Guidelines provide a comprehensive framework to encourage and assist financial institutions in implementing an Environmental and Social Management System. The new Guidelines also enable Bangladesh Bank to monitor implementation through increased reporting requirements for banks.

Through the process of developing and refining the ESRM guidelines, Bangladesh Bank has learned the importance of raising awareness about E&S issues among banks to encourage implementation.

The consultation process in 2010/11 consisted largely of sensitisation training among the managing directors of banks. Bangladesh Bank had to convince banks of the importance of E&S risks and demonstrate how ESRM is relevant to the broader risk management framework. Bangladesh Bank also developed a capacity-building program to support bank managers and employees to implement an ESMS in their financial institution. Through this process, Bangladesh Bank observed a growing level of awareness and enthusiasm for risk management and sustainability in the financial sector.

Awareness raising and capacity building has been accompanied by monitoring and enforcement to ensure ESRM implementation.

In Bangladesh, E&S risk is monitored alongside other banking risks and is linked to international and domestic regulatory approaches accordingly. In 2012, Bangladesh Bank integrated environmental risk management into its implementation of Pillar Two of the Basel II Accord. Through this, banks are required to maintain an additional capital buffer over the Capital Adequacy Ratio that accounts for exposure to environmental and climate risk. Bangladesh Bank collects data from banks to monitor their ESRM implementation, including the share of transactions with high E&S risk for each bank or financial institution and the actions taken by boards to address these transactions. Through this monitoring, Bangladesh Bank generates sustainability ratings for banks, which are incorporated within their overall CAMELS rating (the supervisory rating system used to classify a bank’s overall condition). Bangladesh Bank continues to adapt its approach to monitoring and enforcement to effectively engage with banks on ESRM implementation. Priorities include: (1) improving banks’ incentives to exceed the minimum requirements for ESRM implementation; (2) building supervisory capacity for assessing environmental and social risks; and (3) monitoring the impact of banking activities on the environment.

Key lessons from Bangladesh Bank’s experience in supporting ESRM implementation include the importance of

  • Awareness-raising and capacity building – banks initially didn’t understand the importance of E&S risks to their operations, but Bangladesh Bank worked extensively with managing directors of financial institutions to convince them of the business case for ESRM ;
  • Comprehensive integration of E&S risks into the broaderrisk management framework – through incorporating E&S risks into macroprudential regulation, banks were able to understand the importance of ESRM, and Bangladesh Bank was provided with the tools for enforcement;
  • Clear policy framework – the success of ESRM implementation in Bangladesh is attributed to having a comprehensive policy that clearly specifies the activities required by banks, with appropriate monitoring and enforcement;
  • Developing and refining ESRM guidelines over time – through a gradual process, banks have been able to develop their internal capacity to implement their ESMS; and
  • Taking advantage of external resources – in developing ESRM guidelines and supporting the implementation of them by banks, Bangladesh Bank has benefited from World Bank support to develop the financial sector in Bangladesh and has also made extensive use of peer learning within the SBN network.