Mainstreaming ESG Financing in Bangladesh    

“When the last tree is cut, the last fish eaten, and the last stream poisoned, you will realize you can’t eat money.” The old Cree Indian warning feels more relevant than ever, especially in a world that keeps chasing quarterly gains while ignoring the long-term costs of climate and social neglect.  For Bangladesh, the message hits close to home. Rising sea levels, floods, and resource stress are no longer distant risks; they are economic realities that shape investment, production, and livelihoods. Across industries and financial institutions, a new question is emerging: Can growth be sustained if it destroys the very foundations that support it?   

This is where ESG investing steps in. It reframes the idea of return, linking financial performance with environmental stewardship, social equity, and governance integrity. The real test for Bangladesh now is whether it can show that future cash flows can grow without exhausting the future itself.   

What is ESG Investing? 

ESG investing is the integration of Environmental, Social, and Governance considerations into investment decisions. It shifts finance from a purely profit-driven model to one that evaluates risk, return, and responsibility together. In simple terms, ESG finance directs capital toward businesses that deliver sustainable growth that are economically viable, socially inclusive, and environmentally responsible. 

The concept originated in a 2004 UN Global Compact report, Who Cares Wins, which argued that better environmental and social management leads to stronger financial performance. Since then, ESG has evolved from a voluntary ethical preference to a mainstream investment mandate, now projected to grow to USD 40 trillion by 2030.ⁱⁱ 

The Global Rise of ESG Investing 

What began as a niche movement led by ethical investors has now transformed into a defining force in global finance. As of December 2024, global ESG investing market size have reached USD 29.86 trillion.ⁱⁱⁱ In Europe, a total of Euro 373 billion ESG bonds, sustainability-linked, and green bonds were issued in Q1 2025.^iv In 2025, US ESG mutual funds and ETFs held assets worth approximately USD 605 billion.^v 

Asia is emerging as the next growth engine. Over the past decade, the region accounted for 29 percent of global corporate sustainable bond issuance, emphasizing its growing role in ESG capital flows. Asia-domiciled funds focused on ESG, or sustainability contain roughly USD 83 billion in assets under management.^vii 

Globally, the cumulative volume of ESG-themed bonds like green, social, sustainability, and sustainability-linked has now surpassed USD 6 trillion^viii 96 percent of the world’s 250 largest companies (the G250) now report on sustainability or ESG matters.^ix 

These are the key global frameworks shaping how companies report and disclose their sustainability and ESG performance. The Global Reporting Initiative (GRI) provides the most widely adopted sustainability standards, focusing on how business activities affect stakeholders and the environment.^x The Sustainability Accounting Standards Board (SASB) offers sector-specific metrics that emphasize financially material ESG factors,^xi while the Task Force on Climate-Related Financial Disclosures (TCFD) sets out guidance for companies to report climate-related risks, governance, and strategy.^xii The Climate Disclosure Standards Board (CDSB) focuses on integrating environmental and climate data into mainstream financial filings.^xiii 

The global landscape is now converging under the International Sustainability Standards Board (ISSB), a new entity under the IFRS Foundation.^xiv The ISSB’s IFRS S1 (general sustainability disclosures)^xv and IFRS S2 (climate disclosures)^xvi build upon TCFD and SASB principles to create a single, investor-focused global baseline. 

ESG Instruments: Turning Intent into Investment 

Over the past decade, a diverse set of tools has emerged to channel funds toward responsible and resilient growth. Here are a few key instruments driving the ESG investment growth –  

1. Green Bonds: Green bonds are debt instruments whose proceeds are specifically allocated for environmentally beneficial projects. Investors receive traditional bond returns but with an addition of impact reporting and certification that tracks environmental outcomes.  

2. Social and Sustainability Bonds: Social bonds direct financing toward projects that generate positive social outcomes, such as affordable housing, quality education, healthcare, and financial inclusion, while sustainability bonds combine both environmental and social objectives. 

3. Sustainability-Linked Loans (SLLs): SLLs represent a shift from project-based financing to performance-based financing. Rather than limiting funds to specific uses, these corporate loans tie interest rates or margins to the borrower’s achievement of predefined ESG targets or Key Performance Indicators (KPIs). When companies meet or exceed those thresholds, they enjoy lower borrowing costs. 

4. Transition Bonds and Transition Finance: Transition bonds are for carbon-intensive industries seeking to gradually decarbonize their operations. Funds are used to modernize facilities, adopt cleaner technologies, or improve efficiency as part of a credible low-carbon pathway.  

5. Green or ESG-Linked Guarantees and Blended Finance: Development finance institutions (DFIs), multilateral banks, and climate funds deploy guarantees, first-loss tranches, and concessional capital to de-risk private investment in ESG projects. Known as blended finance, this approach combines concessional and commercial capital to mobilize larger flows into high-impact areas that might otherwise be considered too risky or unproven. 

Market Trends and Capital Flows in Bangladesh 

Bangladesh is quietly building an active ESG finance ecosystem. What began as a central bank mandate has evolved into meaningful capital flows toward greener and more inclusive growth. In Q1 2025, banks and financial institutions disbursed BDT 1,49,819 crore in sustainable finance which is up BDT 1,703 crore from the previous quarter.^xvii Ready-made garments, renewable energy, and sustainable agriculture are among the leading sectors in getting ESG financing. In 2018, sustainable lending accounted for 8 percent of total credit; today, it represents 40 percent.^xviii 

The equity market is also evolving. Seven Bangladeshi firms now appear on Bloomberg’s global sustainability index.^xix The Bangladesh Securities and Exchange Commission (BSEC) has made ESG disclosure mandatory for listed companies,^xx while Bangladesh Bank now requires banks and NBFIs to report on sustainability performance, aligning domestic regulation with international norms such as IFRS S1/S2 and GRI Standards. 

Innovation is emerging on the debt side as well. Standard Chartered Bangladesh’s corporate green bond for PRAN Agro Limited marked the country’s first green bond (with a face value of BDT 1.5 Bn).^xxii In 2025, BRAC Bank secured approval from the Bangladesh Securities and Exchange Commission and Bangladesh Bank to issue the country’s first-ever Social Subordinated Bond, which is valued at BDT 1,000 crore.^xxiii Together, these instruments signal that Bangladesh is beginning to embed sustainability into its allocation of capital. 

Challenges and Gaps in ESG Integration 

Bangladesh’s ESG finance momentum is undeniable, but the foundation remains fragile. Beneath the progress lie structural barriers in data, capacity, incentives, and governance that could slow the transition from policy ambition to market reality. 

1. Weak Data and Verification Systems: Every credible ESG system starts with reliable data, and that remains Bangladesh’s weakest link. Most financial institutions depend on self-reported borrower data, often without independent validation. SMEs, which account for 87 percent of active labour force,^xxiv rarely maintain ESG records or disclosure frameworks. Third-party verification remains scarce, raising greenwashing risks which is a growing global concern as 71 percent of institutional investors cite poor data quality as their biggest ESG investment barrier.^xxv 

2. Limited Capacity and Technical Expertise: Policy has outpaced practice in Bangladesh. While Bangladesh Bank has sustainable finance policy and Guidelines on Environmental & Social Risk Management (ESRM), implementation depends on people who often lack the training to operationalize them. Credit assessments still focus on traditional financial ratios rather than lifecycle emissions, labour practices, or climate exposure. Without proper training in climate risk modelling, carbon accounting, and ESG-linked financial analysis, institutional capacity will remain a bottleneck. 

3. Misaligned Incentives:  Sustainable financing is yet to a profitability strategy for most banks, rather it’s a quota to fulfil. Interest rates rarely reward ESG improvements, meaning borrowers who invest in green upgrades face the same financing costs as those who don’t. In contrast, sustainability-linked loans (SLLs) globally reduce margins when companies meet ESG targets, creating tangible motivation. Until capital costs reflect sustainability performance, ESG lending will struggle to compete with higher-yield sectors like trade or consumer finance. 

4. Limited Pipeline of Bankable Projects: The gap between ESG ambition and investment readiness is wide. Many adaptation projects don’t fit traditional loan models and are considered too small or risky for banks. Aggregation platforms and blended-finance vehicles that could pool smaller projects are still underdeveloped, keeping development aid and concessional finance as the primary ESG capital sources rather than private investment. 

5. Lack of Market Depth: The bond market, representing barely 12 percent of GDP, limits access to long-term green capital.^xxvi Only a few ESG debt instruments like Standard Chartered’s Green Bond have emerged, while Green Sukuk and ESG ETFs remain untapped. Without stronger regulatory enforcement, assurance mechanisms, and deeper capital markets, ESG integration risks plateauing. 

Bangladesh’s ESG finance journey must be shifted from policy design to institutional readiness. The next phase requires credible data, skilled professionals, aligned incentives, and stronger market infrastructure. Success will depend on whether Bangladesh can transform ESG finance from a compliance exercise into a competitive advantage. 

The Road Ahead: Global Lessons for Bangladesh’s ESG Finance  

Bangladesh has made good progress so far, from being one of the first developing nations to issue green banking guidelines to now disbursing significant credit through sustainable finance channels. But progress built on policy needs the next ingredient: execution that scales. 

The good news is Bangladesh doesn’t have to start from scratch. Around the world, peers like Indonesia, India, and Vietnam have already tested models that bridge data gaps, attract investors, and build trust in ESG systems. 

Figure 7: Recommendations for mainstreaming ESG finance 

1. Build a National ESG Data and Verification Framework: Bangladesh’s ESG ecosystem currently lacks a standardized, verifiable data infrastructure. Most banks and corporates depend on self-reported ESG information, with limited third-party assurance. This weakens comparability and increases the risk of greenwashing. 

To strengthen credibility, a National ESG Data Repository should be established under Bangladesh Bank and the Financial Reporting Council (FRC). This platform would store sector-level indicators, emission benchmarks, and climate exposure data. Third-party assurance should be made mandatory for ESG reports, while domestic ESG rating agencies should be accredited to enhance transparency. 

Lessons from Malaysia: Malaysia’s Climate Change and Principle-Based Taxonomy (CCPT) require financial institutions to classify assets by environmental impact and disclose portfolio exposure.^xxvii Within two years, it significantly improved data quality and investor confidence in ESG disclosure. 

2. Build Institutional Capacity and ESG Literacy: Policy progress in Bangladesh has outpaced institutional capacity. Many banks and corporates still lack trained ESG specialists capable of assessing climate risk, social impact, or governance performance. 

To close this gap, Bangladesh should launch a National ESG Training Program for bankers, regulators, auditors, and listed companies. Partnerships with IFC, ADB, and UNDP can provide modules on climate risk analysis, ESG integration in lending, and disclosure best practices. ESG Centres of Excellence in leading universities can further develop local expertise and certification pathways. 

Lessons from Kenya: The Kenya Bankers Association’s Sustainable Finance Initiative (SFI) has trained more than 52,000 professionals, helping financial institutions embed sustainability into credit decisions and risk management frameworks.^xxviii 

3. Align Financial Incentives with ESG Performance: ESG finance in Bangladesh is often seen as a compliance requirement rather than a business opportunity. Loan pricing, refinancing, and tax structures rarely reward firms for strong ESG performance. 

To change this, Bangladesh Bank can introduce ESG-linked loan pricing that offers lower interest rates for verified sustainability achievements. ESG metrics can also be integrated into public procurement and PPP evaluations, while high-performing borrowers may access tax rebates or refinancing incentives for meeting ESG targets. 

Lessons from Chile: Chile’s Sovereign Sustainability-Linked Bond (USD 2 billion, 2022) directly ties the government’s borrowing cost to national emissions and renewable energy targets,^xxix a model where sustainability excellence reduces financing cost. 

4. Expand the Range of ESG Financial Instruments: Bangladesh’s capital markets remain narrow, limiting opportunities for ESG-oriented investors. The bond market accounts for just 12 percent of GDP,^xxx and few ESG-linked debt products exist. 

To diversify instruments, Bangladesh should develop a Sovereign Green and Sustainability Bond Framework, endorsed by Bangladesh Bank and the Ministry of Finance, to standardize ESG-linked issuances. The country’s Islamic finance base can be leveraged to introduce Green Sukuk and Transition Bonds for renewable energy, waste management, and green industry upgrades. 

Lessons from Indonesia: Indonesia’s Sovereign Green Sukuk, first issued in 2018, has raised over USD 9.6 billion for climate-aligned projects, demonstrating how Islamic finance can drive sustainability at scale while appealing to global investors.^xxxi 

ESG finance is no longer a moral choice; it is an economic necessity. In a world reshaped by climate shocks, shifting trade regimes, and sustainability-driven capital markets, Bangladesh’s prosperity now depends on how effectively it can integrate purpose into profit. With its young workforce, proven reform capacity, and growing investor interest, Bangladesh has every ingredient to lead South Asia’s ESG transformation. If regulators, private investors, and development partners act together, Bangladesh can evolve from a policy pioneer to a regional ESG finance hub, one that channels capital toward financial growth without compromising the future. 

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