Transforming Waste to Wealth: Strategic Insights for Bangladesh’s Circular Economy

Originally published on the LightCastle Partners website.

The Circular Economy (CE), as opposed to the linear economy, is a sustainable system where economic growth is decoupled from resource use, through the reduction and recirculation of natural resources (1). The concept of the Circular Economy (CE) is gaining traction among governments, scholars, businesses, and the public as an essential move toward addressing climate change.

Major developments in the past decade such as the Paris Agreement of 2015, the annual UN Climate Change Conferences (COP), initiation of the Green Climate Fund (GCF) demonstrate the same. Net-zero commitments from major economies like the EU, China, and the USA are promising. Their interconnected supply chains have the potential to create a ripple effect.

There is a point to this rising urgency to act. The Paris Agreement aims to limit global warming well below 2 degrees Celsius above pre-industrial levels, ideally to 1.5 degrees Celsius. As reported by Germanwatch,  Bangladesh is ranked the 7th most climate change-vulnerable country and would face severe environmental consequences if global efforts fail to meet the targets (2).

Increased flooding, cyclones, and storms could render severe economic and ecological impact. Under moderate climate scenarios, crop production will decline by 17% for rice and 61% for wheat (3), putting the country’s food security at risk. 

Imperatives of the Transition to Circular Economy

Over the past two decades, local CO2 emissions have increased by an average of 8% annually and the RMG sector has been the primary contributor (4). The latest Country Environmental Analysis (CEA) report reveals that each individual in Dhaka produces 22.5 kilograms of plastic waste per year (5). This issue is exacerbated by the fact that nearly 38% of the microplastics generated by the dyeing (6), pharmaceutical and battery industries are discharged into water bodies, eventually making their way into the food chain.

Several MNCs in Bangladesh have already embraced the CE paradigm with their commitment to sustainable manufacturing across the value chain, waste management and design innovation. As a matter of fact, a Standard Chartered study suggested that 78% of the MNCs will remove suppliers that impede their carbon transition plan by 2025 (7).

Bangladesh being a key emerging market —especially in RMG, textile, leather, ship recycling, pharmaceuticals —has an urgent need to ensure that its value chains are contributing positively to the buyers’ carbon transition plan. Businesses can adopt sustainable practices like using renewable energy and optimizing resource use. However, the most comprehensive strategy is the adoption of circular business models. 

As reported by the Ellen MacArthur Foundation, the circular economy principles entail eliminating waste, keeping products in use at their highest value, and regenerating biodiversity (8). In Bangladesh, circularity has been a prominent topic of discussion in the apparel sector for a while now. Last year, the European Commission launched the EU Strategy for Sustainable and Circular Textiles (9), which includes a mandatory minimum level of recycled fibers in clothing.

In addition, the Commission intends to introduce a Digital Product Passport. This is aimed at providing consumers with comprehensive information related to energy consumption, recycled content, presence of hazardous substances, and so on. 

In alignment with EU directives, prominent brands like H&M are aiming to achieve 100% of their clothing production using recycled yarns. Similarly, Decathlon is promoting the use of renewable electricity among its suppliers. In 2023, H&M Group and the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) entered an MOU to foster a circular garment industry, while also advancing the renewable energy sector.

Bangladesh is moving towards progressive reduction of subsidies to the Power and Energy sector. Coupled with recent price hikes, this led to increases in electricity tariffs (10), with a rise of about 9.9% per kilowatt-hour (kWh) for medium and large industries. Such adjustments can incentivize manufacturers to adopt rooftop solar or other forms of renewable energy  in order to protect from external shocks such as rising fuel prices. 

However, the 1% customs duty on solar panels and, more worryingly, the 37% customs duty on solar inverters has significantly raised the cost of solar energy in Bangladesh (11). The high duty on inverters is applied because they are classified as “other static converters” and are not granted special status despite being crucial for solar energy production.

Additionally, the existing refinancing scheme provides a loan amount of BDT 100 million for net-metered rooftop systems, which falls short of the financial needs of most industrial players. As a result, investing in solar solutions requires significant funding that most banks are unable to offer, even with the central bank’s mandate to allocate 5% of their total loans as “green loans.”

Role of Circular Financing in Enabling the Transition

Circular Finance is any type of instrument where the investments will be exclusively applied to finance or refinance, in part or in full, new and/or existing eligible companies or projects integrating the circular economy in their operations (12).  

As the urgency of the climate crisis escalates, it’s imperative for both public and private sectors to join forces in confronting the escalating menace of climate change, aiming to cap the global temperature increase at 1.5 degrees Celsius—a goal that currently seems significantly off track.

Across the globe, stakeholders are under pressure to swiftly act and finance measures to alleviate the impacts of climate change, paving the path towards a low-carbon economy by reducing greenhouse gas emissions, expanding access to clean energy solutions, and more. While several of the United Nations’ Sustainable Development Goals (SDGs) target various environmental issues, the UN estimates an annual funding requirement of $3-5 trillion to translate these goals into reality (13).

Given that large-scale capital is needed for a low-carbon transition—to mitigate the effects of climate change, support solutions for climate adaptation, and reduce global greenhouse gas emissions—the need for circular finance is more urgent now than ever before.

While most RMG factories are now equipped with Effluent Treatment Plants (ETPs), many are alleged to be non-functional. Given this scenario, addressing textile waste might seem like a far-fetched idea. Export-oriented garment factories in Bangladesh generate around 0.4 Mn tons of textile cutting waste, known as ‘jhut’ (14). The majority of this pre-consumer waste is either exported to India or downcycled for low-value applications.

This is primarily because the country lacks an efficient sorting and collection system. The diversity of textile materials – varying in fibre type and color – complicates the sorting process, requiring sophisticated technology. These technologies are mostly European which require substantial investments for deployment. Consequently, there is a need for low-cost financial support for the garment recycling industry through a green/sustainable financing scheme. 

Currently, Bangladesh’s textile sector is experiencing a wave of innovation. Spearheaded by the country’s start-ups, the sector is focused on promoting sustainability. Some of these companies convert plastic waste into useful accessories for RMG or ready-made garments. Bangladesh also has a robust plastic waste product market worth BDT 400 Bn (15). In this sector too, insufficient funding for waste and recycling infrastructures has resulted in reliance on inefficient waste treatment services provided by local authorities.

As per the findings of the World Bank, the MSME sector faces a financing deficit of $2.8 Bn (16), with 60% of women-owned SMEs requiring additional collateral.  Enhancing the capacity of MSMEs to cope with climate change is paramount, and extending greater access to climate finance can significantly contribute to these objectives.

Overview of the Policy Landscape

The Sustainable Finance Policy (2023), intended to empower sustainable businesses and initiatives, is the most recently published cornerstone policy of the Bangladesh Bank. The document provides a comprehensive outline of what the Bangladesh Bank will recognize as sustainable financing. The figure below provides a top-level view and outlines the Intended Nationally Determined Target Contribution targets of Bangladesh. 

Table: Sustainable Finance Taxonomy and respective Intended Nationally Determined Contribution of Bangladesh

As a screening criteria for loan proposals, Bangladesh Bank asks FIs to consider 6 environmental objectives:

• Climate change mitigation 
• Climate change adaptation 
• Sustainable protection of water and marine resources 
• Transition to a circular economy, waste prevention and recycling 
• Pollution prevention and control 
• Protection and restoration of biodiversity and healthy ecosystems

If an activity contributes substantially to any 1 of the 6 objectives without doing significant harm to the other 5, the proposal is deemed eligible to go through the next steps. Subsequently, the activity goes through a risk assessment procedure through utilization of the tools “Environmental and Social Due Diligence” and “Credit Risk Management Guidelines” of the Bangladesh Bank (17). In 2014, the central bank advised banks to maintain a 20% of their annual portfolio through Sustainable Financing. Green Finance, a subset of Sustainable Finance, is advised to form 5% of a bank’s loan portfolio (18). 

Trends in Sustainable Financing Disbursement

The directive is bearing fruit as the proportion of Green Financing and Sustainable Financing within Banks’ loans portfolios have been increasing on a national scale.

However, perhaps it would be interesting to also examine how the financing is distributed across activities or sectors.

Looking at the top 3 sectors by % of Green loan disbursed to in 2023, it is evident that majority of the demand for financing is arising from factories looking to invest in resource or energy efficient technologies, or companies establishing new factories, through integrating green guidelines, e.g. LEED certification. Green CMSMEs, Renewable Energy initiatives comprise 5.1% and 4.1% respectively. The demand for financing from projects that integrate circularity in their operations is still on the lower side.

Challenges in Promoting Circular Economy 

In the last 13 years (2010-2023), around $30 billion in foreign investment has been injected into the energy sector of Bangladesh. However, the majority of these investments have been directed towards fossil fuel sources. This preference stems from prioritizing the financial gains of fossil fuel-based energy production. While the Bangladesh Bank offers an affordable refinancing scheme worth BDT 4 Bn, it is highly competitive among 70 categories of environmentally friendly projects. 

Furthermore, banks and financial institutions are often discouraged from distributing green finance. This is due to the high transaction costs and the longer maturity periods compared to other loan schemes. Additionally, the technology used in green projects is relatively new in Bangladesh, and without a strong supply chain, this often leads to poor management. And most importantly, training and capacity building of sustainable finance departments has to be given due consideration. 

Micro, small, and medium enterprises (MSMEs) face significant challenges when it comes to proper documentation during loan applications, which hinders their access to necessary financing. Due to their size and limited capacity to absorb credit, MSMEs also struggle with the issuance of green bonds.

These enterprises often serve as backward linkages within the supply chains of larger manufacturing companies, playing a critical role in the overall production ecosystem.

Overall, although some banks have introduced Sustainable Finance help desks to educate clients, widespread adoption demands bridging the knowledge gap among businesses and enhancing the financial sector’s capabilities.

Policy Recommendations

Addressing the climate crisis, from a governance perspective, often boils down to a conundrum for governments in Build and Grow countries. The Circularity Gap Report (19) finds that with the constrained public financing available, countries like Bangladesh face a difficult choice between funding essential services for development and reducing its carbon footprint.

Circular economy practices provide an approach to mitigate the perceived trade-off between supporting development and addressing the climate crisis, by instead addressing both issues as one. That being said, it requires a strategic, robust and synergistic regulatory environment to facilitate the transition as seamlessly as possible.

Figure: Environmental Policy Development of Bangladesh (Timeline)

The key foundation for environmental protection is enshrined in Article 18A of Bangladesh’s Constitution from 2011, which recognizes it as a fundamental right and establishes that the state must “endeavor to protect and improve the environment and to preserve and safeguard the natural resources, biodiversity, wetlands, forests and wildlife for the present and future citizens.”

The legislation covers a wide range of environmental and natural resource issues, including noise, air, water pollution, forests, biodiversity conservation, and wetland management. While it is not crystal clear to what extent fairness in enforcement takes place, existing policies are

comprehensive, consisting of proper policy mixes. However, certain modifications could facilitate better use of existing resources.

Formulate Industry-specific Strategy and Guidelines

While Bangladesh took a step towards a circular economy with the National 3R Strategy in 2010, a Deloitte report highlights a more comprehensive approach to achieve substantial progress (20). First, a thorough examination of resource use (materials and energy) across different industries is crucial. Second, a prioritization exercise needs to be conducted to identify sectors that stand to benefit the most from adopting circular business models.

To put forth an example, Bangladesh’s garment industry generates a staggering 0.4 Mn tonnes of leftovers annually, yet over 25% of these resources are simply discarded.  By recycling these leftovers into new yarns and utilizing them in garment remanufacturing, Bangladesh could unlock a $6 Bn business opportunity while simultaneously reducing waste and environmental impact (21).

During its recent G-20 Summit, India  embraced four priority areas for the circular economy:

• Steel sector
• Extended Producer Responsibility (EPR)
• Circular bioeconomy and
• Industry-led resource efficiency.

Overall, circularity is best pursued in the sectors where it can be aligned with existing policy aims, rather than as a generic economy-wide strategy. 

Facilitate Investment Mobilization to MSMEs

For the transition to a truly circular economy, it is essential that MSMEs integrate circular practices into their operations. This shift is not only beneficial for sustainability but also for enhancing the resilience and efficiency of the entire supply chain. However, the financial constraints faced by these smaller organizations are even more pronounced than those encountered by larger companies. They often lack the resources to invest in new technologies and processes that support circularity.

To address these challenges, specific policies must be developed to facilitate investment mobilization towards MSMEs. This can include creating financial instruments tailored to the needs of smaller enterprises, providing technical assistance, and ensuring easier access to green financing options. 

Enforce Extended Producer Responsibility

Sustainable waste management constitutes a critical milestone in the framework of Vision 2041. However, the absence of Extended Producer Responsibility (EPR) regulations remains a significant impediment to progress.

In Vietnam, the Law on Environmental Protection (2020) promotes a circular economy by requiring producers to take back and responsibly manage their products at the end of their lifespan.  It further incentivizes consumers to join the loop by choosing eco-friendly products and actively participating in waste separation and collection programs. 

Given the varied nature of manufacturers across different industries, a tailored approach to their environmental obligations is essential. Nonetheless, irrespective of the sector, the EPR policy should encompass the following elements:

• Identifying specific product categories that fall under EPR
• Establishing goals and metrics for recycling and waste reduction
• Implementing penalties for non-compliance

Comprehensive Policy Framework for Waste Management

In 2020, The Department of Environment (DoE) issued a notice urging manufacturers and sellers of polyethylene and multi-layered plastics (MLPs) to switch to eco-friendly packaging. Otherwise, businesses had to take responsibility for properly disposing of their MLP waste at their own cost, aligning with the “Polluter Pays Principle.”

This was followed by the government’s 2021 Solid Waste Management Rules but the enforcement has been weak. As such, the country requires setting clear objectives for waste management, emphasizing the role of informal waste workers, and establishing measurable targets for waste reduction and recycling. In addition, mandatory waste management plans for cities above a certain population threshold need to be implemented.

Collaboration with Multilateral Development Banks

While Bangladesh has the capacity to assess the circular potential and develop strategies, external assistance is necessary for implementation. The government should actively explore collaboration opportunities and targeted technical support. Multilateral Development Banks (MDBs) are well-positioned to facilitate this, but they can only act upon client requests.

MDBs are gaining expertise in deploying circular economy solutions for sustainable development, but it’s crucial for the government to signal where help is needed and seek specific support for their goals. The Government of China has implemented successful industrial symbiosis practices to generate collaboration between industries, redesign material flows and create pipelines for waste-to-resources, leveraging direct support from the World Bank to drive this process (22).

Strategic Allocation of Public Spending 

The budget for operating and development expenditure in FY24 was approximately $65.3 Billion (23). Of the approximately $3.8 Billion ADP allocated for the power and energy sector, only 2.4 percent was allocated for renewable energy. Apart from direct incentives and monetary support, strategic modifications like making public procurement policies circular enterprise friendly, could be a way the government can use its resources to support the development of circularity within the economy. 

Introducing landfill tax is another way to deter industries from manufacturing processes that generate large volumes of waste. If disposing of waste bears no cost, the problem will not be addressed. 

The government should consider developing a framework to identify and certify circular products and services, and reduce/eliminate VAT on the identified products. This would help the products be more price competitive, generate demand and facilitate the market’s development.

Community Engagement and Public Awareness

To enable individuals, the Indian PM’s call to Mission LiFE – Lifestyle for Environment makes citizens mindful of their choices, discouraging throwaway culture, increasing consumer awareness about the problems of waste generation, and reducing environmental footprints. Bangladesh can significantly benefit from adopting strategies similar to India’s Mission LiFE by enhancing community awareness and public engagement to promote circularity and environmentally sustainable practices.

In conclusion, the transition to a circular economy in Bangladesh is not merely a strategic option but a pressing necessity, particularly in light of the country’s vulnerability to climate change and the urgent need to align with global sustainability commitments. The apparel sector, a significant economic driver, currently stands at the forefront of this transformation, with efforts being made to integrate circular practices and renewable energy sources.

However, the success of this transition hinges on the collective efforts of the government, private sector, and international partners. Strategic policy interventions, financial incentives, synergistic collaborations, and community engagement are critical to fostering an environment where circular economy principles can thrive. By embracing circularity, Bangladesh can significantly mitigate environmental impacts, enhance economic resilience, and secure a sustainable future for its industries and communities.

References

1. Natural Resource
2. Germanwatch, Global Climate Risk (2021)
3. ADB, 2023
4. Green Climate Fund
5. Bangladesh Country Environmental Analysis 2023
6. Occurrence and characteristics of microplastic in different types of industrial wastewater and sludge
7. Standard Chartered Press Release (2021)
8. Ellen MacArthur Foundation
9. EU Strategy for Sustainable & Circular Textiles
10. Energy price hike makes clean energy compelling (The Daily Star, April 2024)
11. Tax on solar panels and inverters: How it hinders Bangladesh’s path to a sustainable future
12. Raes et al. (2018)
13. Global Impact Investing Network (GIIN)
14. The EU strategy for sustainable and circular textiles (The Business Standard, 2023)
15. Bangladesh’s growing plastic recycling industry (The Financial Express, 2024)
16. Unlocking climate finance for MSMEs in coastal Bangladesh
17. Bangladesh Bank, Sustainable Finance Policy (2023)
18. GBCSRD, Circular no. 4
19. Circle Economy Foundation, 2024
20. Deloitte report
21. Throwaway RMG wastes (The Financial Express, 2023)
22. The World Bank, 2020
23. Ministry of Finance, 2023

Authors

The article was authored by Naziba Ali, Business Analyst and Priyo Pranto, Business Consultant at LightCastle Partners. For further clarifications, contact: [email protected]