Green Finance: History
Please note this is an old version of this entry, which may differ significantly from the current revision.
Subjects: Business, Finance

The concept of green finance, also known as green investments, is widely employed in academia and business, and have a variety of meanings. Green finance (GF) is a developing concept that lacks a clear and universal definition. However, the goal of GF is to balance the advancement of monetary events, environmental stability, and ecological protection to accomplish long-term development. 

  • green finance
  • sustainability performance
  • banking
  • SEM
  • Bangladesh

1. Introduction

In recent years, most countries, particularly in the developing world, are focusing on economic expansion, while downplaying ecological improvement. Consequently, different environmental problems such as air pollution, climate change, land loss, biodiversity loss, deforestation, environmental damage, etc., have emerged [1][2]. Recently, the international agreement on environmental preservation, action against climate change awareness, and the United Nations’ advocacy for SDGs by the year 2030 [3] have collectively heightened the interest in green finance [4][5]. The implementation of an effective green economy through green finance is a significant outlet for economic growth and sustainability in underdeveloped nations [6][7]. Therefore, to ensure sustainable and uniform development, the consciousness of environmental issues should be invoked among academics, bankers, investors, administrations, legislators, advocacy groups, corporations, and communities [8]. Unfortunately, the extent of the success of environmental sustainability among the various stakeholders remains unclear.
Climate change and its respective environmental implications have become a major issue affecting developed and developing countries[9]. In a developing and agro-based country such as Bangladesh, it resulted in an economic hardship owing to its high susceptibility to weather changes [10][11]. Consequently, several strategies, such as the prevention of environmental degradation and the implementation of sustainable development through formal and coordinated green investments as per global norms, have been enacted [1] to mitigate the threats and environmental consequences of climate change [12]. In this regard, banking institutions can play an important role by investing in a variety of environmentally friendly projects, such as renewable energy, clean energy, green industry development and waste management, among others [2][8], all of which directly contribute to the nation’s long-term economic development [1]. Therefore, green finance can be regarded as a vital financial instrument for improving the sustainability performance of an organization and the achievement of SDGs in a country.
The financial industry of Bangladesh is not only dominated by banks [13] but also non-bank financial institutions (NBFIs), insurance companies, microfinance institutions, and capital market intermediaries. Under the supervision of Bangladesh Bank (the country’s central bank), there are 59 scheduled banks and 5 non-scheduled banks functioning in the country. On the other hand, there are also 34 NBFIs operating businesses in Bangladesh. In comparison to industrialized countries and sophisticated markets, the banking industry meets both the country’s long- and short-term finance demands [13][14]. Considering the importance of commercial banks in developing the green economy of Bangladesh, it is imprudent to ignore the financial industry in the economic paradigm shifting toward the integration of environmental factors. In this regard, the banking sector in Bangladesh plays a crucial role in achieving sustainable economic development of the country through its investments in various eco-friendly projects to mitigate the adverse effects of climate change. In addition, many industrial ventures with potentially major negative social or environmental consequences, such as textiles, cement, steel, power, paper, fertilizers, chemicals, and so on rely heavily on banking institutions for funding [13]. As funders, they have a huge impact on industrial projects, and green banking can therefore play an important role in promoting responsible behavior among businesses [1][13]. Green finance can be considered as a critical financial component in ensuring sustainable economic growth in any country. In terms of green financing, private commercial banks (PCBs) are the significant contributors, accounting for around 75% of total green financing in Bangladesh, followed by NBFIs (12%). Hence, it can be noted that banks and NBFIs have been playing a crucial role in the prevention of environmental deterioration as well as the attainment of SDGs in the country through green financing [1][12][13]. As a result, expanding green finance is critical to achieving sustainable economic growth and ecological sustainability, as well as resolving the existing conflict between economic development and environmental conservation [7][15].
According to Wang and Zhi [16], GF is a new monetary phenomenon that combines economic benefits with environmental conservation, and therefore represents the best option for funding environmentally friendly projects and organizations that prioritize environmental protection [1]. It takes environmental outcomes into account in funding a project and prioritizes investment in various eco-friendly activities, such as renewable energy, waste management (solid and liquid), clean energy, climate change mitigation and adaption strategies, alternative energy, green brick manufacturing, green industry development, paper waste recycling, energy-efficient technology, biodiversity protection, and so on. Therefore, the development of GF is crucial to the banking industry as it aids in the transition to a green economy for better management of concerns, such as climate change, environmental catastrophes, and energy efficiency. The term “sustainability” can be subsequently described as the ability to preserve well-being over an extended and possibly endless length of time. This mostly addresses the environmental aspect of the three pillars of sustainability (social, economic, and environmental); however, it should be noted that the terms “environment performance” and “sustainability performance” are not synonymous [17]. Sustainability performance refers to a firm’s performance in terms of sustainability across all areas and for all determinants of corporate sustainability [18]. Consequently, GF has emerged as a new growth point for the promotion of green economic growth, social responsibility and environmental security [1]. Besides, it also aids banks in improving their sustainability performance [18]. Several nations, such as China and Bangladesh, have developed financial industry sustainability rules in addition to voluntary industry codes of conduct to address both corporate ethics and financial sector stability [19]. For example, Bangladesh Bank established the Environmental Risk Management (ERM) policies for banks and financial institutions in 2011 in order to limit investment in various polluting sectors and enhance financing of more environmentally friendly projects. The ERM guidelines are intended to encourage banks and financial institutions to incorporate social and environmental principles into their credit risk management systems, thereby improving social and environmental standards, as well as sustainability assessment and refinancing initiatives for environmentally friendly projects in Bangladesh [13][19].
Numerous studies have been recently conducted in the field of GF worldwide [1][3][12][20][21][22][23][24][25][26][27][28][29][30][31][32], and these studies are mostly centered on GF for sustainable economic development [23][24][25][31][32]; the impact of GF on Fintech [26]; GF trends and opportunities [3][20][22][28]; the environmental effect of GF reform and innovations [16][29]; GF development and sustainability [1][27][33][34]; GF standards and green bonds [21][30]; and GF and sustainable development [12][35][36][37]. Besides this, a few studies have tried to identify the relationship between GF and the green economy [7][38]; GF, carbon intensity, and non-fossil energy consumption, as well as climate change mitigation in the context of N11, BRICS countries, and China [39][40]; and sustainability performance [18][41]. Although several existing studies have emphasized the practices, prospects, challenges, and sustainable reporting of green financing, bankers’ perceptions regarding the major dimensions of GF and the sources of green financing in the context of Bangladesh [1][2][10][32] and the effect of GF dimensions (social, economic, and environmental) on the sustainable performance of banks remain largely unexplored. Based on primary data, limited studies exist on PCBs in Bangladesh. On the other hand, sustainable finance has recently emerged as an appealing subject of study in the sustainability literature; nevertheless, studies in developing nations are lacking in the literature [42]. To the author’s knowledge, no study on the factors affecting the sustainability performance of the banks has been conducted.

2. Green Finance and Its Dimensions

GF has gained significant prominence in the economic discourse among international groups and state governments since its inception [43]. This interest in GF has similarly risen among academics, scholars, researchers, and practitioners [1][44], and now represents a new financial approach that emphasizes green investment to protect the environment and simultaneously promote economic prosperity [34]. GF is considered an essential element of sustainable banking, with a massive impact on the development of a sustainable economy and business in general [1][2][45]. According to the European Commission, the idea of GF in financial services encompasses investment decisions that integrate environmental, social, and governance principles to ensure the satisfaction of clients and society as a whole (Retrieved from; accessed on 5 January 2021). GF is a comprehensive method that blends various approaches for the improvement in the economic, social, and environmental performance of the monetary system, which is assessed via environmental, social, and governance (ESG) criteria, i.e., factors which are essential parts of sustainable economic development and finance (Financing Sustainable Development: Key Challenges and Prospects, 2019). The major activities of GF include green bonds, microfinancing, sustainable funds, investments in impact, active ownership, credits for sustainable developments, and improvement in entire financial systems in a more viable way [46]. According to the EU high-level expert group on sustainable finance (2017), GF could be broadly described as a financial system that provides and addresses the challenges of sustainable development, sustainable housing, retirement, infrastructure, technological development, climate change mitigation, and other long-term educational and societal issues.
Furthermore, various past studies defined GF as the promotion of economic, social, and environmental influences on financial services [15], with a general impact on the development of a sustainable economy and business [2]. The term “green finance” is the combination of a set of three dimensions regarded as the “Triple Bottom Line,” comprising social, economic, and environmental aspects [1][18]. Notably, most studies uniquely identify GF dimensions. However, only a few studies explore the connectivity of GF dimensions—social, economic, and environmental—in the context of banking sector [1][2][32]. More recently, Zheng et al. [1] examined the GF development in the Bangladeshi banking sector, particularly in PCBs, and discovered that the level of awareness, beliefs, and understanding of the major dimensions of GF (social, economic, and environmental) and sources of green financing among PCB bankers were satisfactory for the successful implementation of GF in Bangladesh to facilitate the country’s long-term economic development. The study also identified the “economic dimension” as the most important dimension driving GF, followed by the “social” and then “environmental” dimensions. In addition, Rashid [47] examined the impact of green financing by financial and non-financial sectors on the overall economic development of Bangladesh. The investigation revealed that the growth pattern of sustainable financing of the financial sector is marginal compared to the overall credit disbursed and remains below the threshold set by the Bangladesh bank. Although GF has huge prospects for the sustainable economic development of Bangladesh, financial institutions including banks have also identified some of the major challenges of its practices, which include the lack of policy formulation, lack of standardized guidelines for reporting, incorporation of environmental issues, etc. In another study [8], it was stated that the enforcement of clear guidelines by the Bangladesh Bank would result in the successful adoption of sustainable banking in Bangladeshi banks. The study also revealed that the lower growth of technological improvement, innovations of financial products, and a lack of social and ecological consciousness of the general community in the banking enterprises could constitute a hindrance to green growth. Therefore, GF can be said to play a crucial role in the improvement in banks’ sustainability performance through the financing of eco-friendly projects, and also the achievement of sustainable economic development of the country.

This entry is adapted from the peer-reviewed paper 10.3390/su131810165


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