Sustainable Finance Policy for Banks and Financial Institutions PDF

Sustainable Finance Policy for Banks and Financial Institutions Chapter-1: Sustainable Finance 1.1. Introduction The definitions of Sustainable Finance in accordance with concerned international stakes such as EU, UNEP and IFC look like the followings:...

Sustainable Finance Policy for Banks and Financial Institutions Chapter-1: Sustainable Finance 1.1. Introduction The definitions of Sustainable Finance in accordance with concerned international stakes such as EU, UNEP and IFC look like the followings: Sustainable finance generally refers to the process of taking due account of environmental, social and governance (ESG) considerations when making investment decisions in the financial sector. More specifically, environmental considerations may refer to climate change mitigation and adaptation, as well as the environment more broadly, such as the preservation of biodiversity, pollution prevention and circular economy. Social considerations may refer to issues of inequality, inclusiveness, labor relations, investment in human capital and communities, as well as human rights issues. The governance of public and private institutions, including management structures, employee relations and executive remuneration, plays a fundamental role in ensuring the inclusion of social and environmental considerations in the decision-making process. Sustainable finance looks at environmental, social and governance (ESG) factors in both market practice and policy frameworks for banking, capital markets, investment and insurance. Sustainable Finance aims at introducing environmental, social, and governance standards, as well as risk management to the lending practices of banks and FIs to promote stability of financial systems in developing countries, and channel finance to responsible entities. UNFCCC defined climate finance as part of Sustainable Finance as: “Finance that aims at reducing emissions, and enhancing sinks of greenhouse gases and aims at reducing vulnerability of, and maintaining and increasing the resilience of, human and ecological systems to negative climate change impacts.” Page 1/54  Sustainable Finance Policy for Banks and Financial Institutions In brief, sustainable finance is the process of taking social, environmental, climatic, and governance considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects. Bangladesh Bank defines Sustainable Finance in a broader manner taking above definitions and Bangladesh scenario in due consideration as well as in conformity with the international norms and standards. Sustainable finance refers to any form of financial service that includes investment, insurance, banking, accounting, trading, economical and financial advice integrating environmental, social and governance (ESG) criteria into the business or investment decisions for lasting benefits of both clients and society at large. Sustainable Finance is about Green Banking, Sustainable Agriculture, Sustainable MSME, CSR that includes Socially Responsible Finance activities with respect to sustainability. Sustainable Finance includes Green Finance or in other way Green Finance is a subset of a wider definition of Sustainable Finance. It also includes a strong focus on gender-equality as a goal of these policy platforms. Sustainable Finance Department of Bangladesh Bank has taken an effort to prioritize the contribution towards sustainability with respect to environmental, social – including gender equality, economic and governance issues those are in conformity with Sustainable Development Goals (SDGs), Perspective Plans (2021-2041), recent 8th Five Year Plan, Vision 2041, Intended Nationally Determined Contributions (INDCs), Mujib Climate Prosperity Plan 2022-2041, Bangladesh Delta Plan 2100, Govt. issued Rules/Regulations/Guidelines/Instructions/Notifications and nevertheless international benchmark /norms /standard. Page 2/54  Sustainable Finance Policy for Banks and Financial Institutions 1.2. Rationale Sustainable Finance Policy is for sustainability considerations in order to mobilize finance towards sustainable growth. Monetary Policy of Bangladesh Bank ingrains priority on Green Finance as a part of Sustainable Finance. Sustainable Finance Policy has been formulated to guide banks and FIs for their participation and contribution in the implementation of the INDCs for attaining respective SDGs. In the INDC, Bangladesh is committed to reduce GHG emissions by 6.73% unconditionally from Business as Usual (BaU) levels by 2030 or a conditional 15.12% reduction in GHG emission from BaU levels by 2030. Sustainable Finance Policy has incorporated target both for green finance and sustainable finance for the banks and FIs which is linked to GHG emissions reductions and strengthened climate resilience as well. Sustainable Finance is a work-stream to support the delivery on the objectives of Green Products/Projects/Initiatives by channeling private investment into the transition to a climate- neutral, climate-resilient, low-carbon, more resource-efficient, green, competitive and inclusive sustainable economy. Sustainable Finance has a key role to play in mobilizing the necessary capital to deliver on the policy objectives as national and international commitments on climate and sustainability objectives. It has to go with the UN 2030 agenda and SDGs and the Paris Climate Agreement. It has to go with the 8th 5YR plan and other perspective plans. The Conventions of the Kyoto Protocol and the Paris Agreement call for financial assistance from member countries with more financial resources to those that are less endowed and more vulnerable. This recognizes that the contribution of countries to climate change and their capacity to prevent it and cope with its consequences vary enormously. 1.3. Alignment of Sustainable Finance with SDGs and INDC SDG The Sustainable Development Goals (SDGs) is a global call to action to end poverty, protect the earth’s environment and climate, and ensure that people everywhere can enjoy peace and prosperity. The UN and its partners in Bangladesh are working towards achieving the SDGs: 17 interconnected Goals which address the major development challenges faced by people in Bangladesh and around the world. In line with 2030 Agenda for Sustainable Development and UN Development System Reform (UNDS), the UN agencies in Bangladesh have been working together in a new and coherent way to support government to implement the SDGs and to enhance the development impact. The UN in Bangladesh has been supporting the government as one of development partners in various projects in the field of sustainable development solutions, poverty alleviation, disaster management, peace, good governance, police reform, human rights, environment, climate change, reproductive health, family planning, population, children & mother’s development, immunization, maternal and child nutrition, food security, adolescence, youth development, empowerment of women, education, literacy, culture, communication, heritage, labour standards and employment, migration, refugees, drugs and crime, industrial development, capacity development, project services, peacekeeping, Page 3/54  Sustainable Finance Policy for Banks and Financial Institutions volunteerism, counter-terrorism, agricultural development, health care and research, HIV-AIDS, trade, atomic energy, inclusive finance transformation, infrastructure and resilience, human settlement and communication and advocacy services. Goal 13 of SDG is on climate action to combat climate change and its impacts including mobilization of climate finance. Nationally Determined Contribution (NDC), 2015, 2021 In anticipation of reaching an agreement at COP21, Parties were invited to communicate their post-2020 climate change adaptation and mitigation targets and commitments ahead of the conference through Intended National Determined Contributions (INDCs). This represented significant progress, as more than 190 developed and developing countries submitted emission reduction and adaptation commitments in the form of INDCs during 2015. For most countries, INDCs define GHG emission reduction targets in the energy, industry, agriculture, waste, land use and forestry, and transport sectors for 2020–2030, but the sectoral focus and time frames vary from country to country. When countries formally ratify the Paris Agreement, their INDCs are converted into their NDC, unless the Party expressly states otherwise. NDCs are at the heart of the Paris Agreement and the achievement of these long-term goals. NDCs embody efforts by each country to reduce national emissions and adapt to the impacts of climate change. The Paris Agreement (Article 4, paragraph 2) requires each Party to prepare, communicate and maintain successive NDCs that it intends to achieve. Parties shall pursue domestic mitigation measures, with the aim of achieving the objectives of such contributions. NDCs are submitted every five years to the UNFCCC secretariat. In order to enhance the ambition over time the Paris Agreement provides that successive NDCs will represent a progression compared to the previous NDC and reflect its highest possible ambition. Parties already submitted their updated NDC by 2021. Bangladesh also submitted its updated NDC in August, 2021 and to meet the unconditional NDC it needs 20 billion USD and conditional NDC, it needs 125 billion USD up to 2030. Parties are requested to submit the next round of NDCs (new NDCs or updated NDCs) in five years thereafter (e.g. 2025, 2030), regardless of their respective implementation time frames. Estimation of financial needs to implement the NDC and the sources of financing are important aspects of every NDCs. Bangladesh has already completed many significant upfront activities for starting the Sustainable Development Goals (SDGs) implementation. The responsibilities of ministries and agencies against each goal and target of the 2030 Agenda have been mapped out. Bangladesh is also one of the signatory parties which outlined what post-2020 climate actions they intended to take as part of INDCs under Paris Agreement to reduce global average temperature and to achieve net zero emissions. Accordingly, Sustainable Finance Components and Sectors under this policy have been aligned with relevant goals and targets of SDGs and INDC’s commitment of Bangladesh in the following manner: Page 4/54  Sustainable Finance Policy for Banks and Financial Institutions Sustainable SDGs Sustainable Finance INDC of SDGs Finance Targets Sectors Bangladesh Components 1.3, 1.4, Sustainable 1. Sustainable 1. Mitigation 1.5, 1.b, Linked Agriculture contribution: 2.3, 5.a, Finance 2. Sustainable  Reduction of 6.1, 8.1, MSME GHG emissions 8.2, 8.3, 3. Socially by 6.73% by 8.9, 9.2, Responsible 2030 inthe 9.3 Finance power, transport and industry sectors (unconditional) 6.3, 6.4, Other 1.Low Risk Rated  Reduction of 7.2, 7.3, Sustainable Projects/Initiatives using GHG emissions 7.a, 8.1, Linked ESDD checklist (other by 15.12% by 8.4, 8.5, Finance than Green Finance, 2030 in the 9.2, 9.3, Sustainable Agriculture, power, transport 9.4, 10.2, 10.3,10.4, Sustainable MSME, SRF and industry 12.5, sectors and Working capital and 13.2, (conditional) demand loan of Green 13.a, 14.1,14.2, Products) 2. Adaptation 14.4,14.5, 2.Working capital and component: 14.6,14.a, demand loan of Green  To protect the 14.c, 17.14, Products/ projects/ population, enhance 17.17, initiatives their adaptive 17.18 Green 1. Renewable Energy capacity and Finance 2. Energy & Resource livelihood options, Efficiency 3. AlternativeEnergy and to protect the 4. Liquid WasteManagement overall 5. Solid WasteManagement development of the 6. Circular Economy & Eco- Bangladesh in its Projects Financing 7. Environment Friendly stride for economic BrickProduction progress and 8. Green/ Environment wellbeing of the FriendlyEstablishments people. 9. Green Agriculture 10. Green CMSME 11. Green SRF 12. Blue Economy Financing 13. Information and Communication Technology 14. Miscellaneous Green 1. Green Investment Bond/GreenSUKUK 2. Impact Fund (linked toSustainability) Page 5/54  Sustainable Finance Policy for Banks and Financial Institutions 1.4. Alignment with other national policies Perspective plan (2021 - 2041) The Perspective Plan 2021-2041 has been prepared to translate the policies and programmes enshrined in the Vision 2041 into development strategies. This document is the development vision of the government of a prosperous Bangladesh, a strategic description of the goals and objectives and a roadmap for its implementation. Perspective Plan 2021-2041 will be a landmark document over the next twenty years as it paves for Bangladesh the way of becoming an upper middle income country by 2031 and a prosperous country by 2041 in the platinum jubilee of its birth. The strategic goals and milestones of the plan include industrialization with export-oriented manufacturing; paradigm shifts in agriculture to enhance productivity, a service sector of the future-providing the bridge for the transformation of the rural agrarian economy to a primarily industrial and digital economy; the urban transition - an essential part of the strategy to move to a high-income economy primarily motivated by the agenda of the government -“our village, our town”; efficient energy and infrastructure; building a Bangladesh resilient to climate change and other environmental challenges; and establishing Bangladesh as a knowledge hub. 8th Five Year Plan, 2021-2025 The 8th five year plan is the latest five year plan of Bangladesh encompassing years from 2021- 2025. It particularly gives emphasis to integrate environmental, climatic and other social issues into the planning and development process. Delta plan, 2100 The GoB has formulated a comprehensive development plan - the Bangladesh Delta Plan (BDP, 2100), focusing on economic growth, environmental conservation, and enhanced climate resilience. The plan lays out holistic and cross-sectoral action needed to improve productivity and minimize disaster risks. Implementing BDP, 2100 goals will require a sustained and long- term effort. These included managing investments; aligning the planning, implementation, and financing process; improving inter-agency and inter-sectoral coordination. Addressing the issues of water sector and climate change are important aspects of BDP 2100 and these sectors have strong linkage with the issues of sustainability. BCCSAP, 2009 The Bangladesh Climate Change Strategy and Action Plan (BCCSAP) is a strategic document of GoB covering climate change adaptation, mitigation, and loss & damage. It sets out 44 Programmes to be taken by Bangladesh over the short, medium, and long term within six strategic areas – food security, social protection and health; comprehensive disaster management; infrastructure; research and knowledge management; mitigation and low carbon development; and capacity building and institutional strengthening. BCCSAP highlighted the importance of exploring the source of climate finance to address all the issues of climate change mentioned in the BCCSAP 2009. Page 6/54  Sustainable Finance Policy for Banks and Financial Institutions National Adaptation Programme of Action (NAPA) 2005, 2009 The purpose of the NAPA is the development of a countrywide programme that encompasses the immediate and urgent adaptation activities that addresses the current and anticipated adverse effects of climate change, including extreme events. The goal of the NAPA is the provision of a framework to guide the coordination and implementation of adaptation initiatives in the country, through a participatory approach and building synergies with related programmes. To implement the projects and programmes sustainably, Bangladesh needs to generate huge amount financial resources. National Adaptation Plan of Bangladesh (2023-2050) Bangladesh has prepared its National Adaptation Plan (NAP) under the leadership of MoEFCC. It tries to cover every sector linked with climate change adaptation including the financial sector. Bangladesh NAP highlighted the importance of sustainability in terms of the strength and the life span of the different activities under the NAP. For implementation of NAP up to 2050, Bangladesh needs 230 billion USD. Financial resources including sustainable finance could be the most important window to implement the project/programme under NAP. BB is aligning its Green Bond Financing policy with NAP. The Bangladesh Climate Fiscal Framework (CFF) 2014, 2020 The CFF, published by the Ministry of Finance, provides principles and tools for climate fiscal policy-making (CFP), helping to identify the demand and supply sides of climate fiscal funds (expenditures vis-à-vis revenue or finance, respectively), and to ensure that CFF is transparent and sustainable in the longer term. The CFF determines:  The equitable division of climate funds and their allocation to relevant sectors  The division of services, identification of the demand for climate fund, and expenditure areas of financial authority for raising revenue, for national and international financing options, and for fiscal tools  A governance framework for climate change funds under national fiscal policy The CFF also recommends a set of climate codes designed to (i) track climate change expenditures for policy analysis and reporting, and (ii) estimate long-term climate finance needs by identifying potential climate-related public expenditures across government ministries. The Bangladesh Climate Fiscal Framework 2020 has been developed as an updated version of Climate Fiscal Framework 2014 by Finance Division. Mujib Climate Prosperity Plan 2022-2041 The Mujib Climate Prosperity Plan (MCPP) includes a number of ambitious new and strengthened adaptation efforts to build resilience in populations and ecosystems through investment this decade to contribute to 2041 outcomes. Minimizing and averting climate - induced losses and damages is also an international financing priority of this Plan. The MCPP was launched under Bangladesh’s second tenure as president of the Climate Page 7/54  Sustainable Finance Policy for Banks and Financial Institutions Vulnerable Forum (CVF). It works to counteract climate induced damage and losses by equipping vulnerable communities, industry, and the government with the Mujib vision supported by optimized financing tools and models that will be key to the new risk management paradigm to bring about resilience and stability, especially for small businesses, vulnerable populations, and the economy. The MCPP expects investment opportunities in resilient pathways including energy, water, transport, supply chains and agriculture value chains, to reach USD 90 billion over the next decade. Optimized financing structures to attract foreign direct investment and mobilize domestic private sector capital include the use of public-private partnerships (PPP) as a key solution to climate investment. Different tools to incentivize investment in low-carbon and climate resilient infrastructure, including preferential refinancing rates, differ entiated capital requirements such as a fossil fuel penalizing factor commensurate with risk and higher capital requirements for non-low-carbon and non-climate-resilient projects can be used by financial sector. The MCPP aims 30% optimal variable RE by 2030, lower energy intensity by 20% by 2030, and 40% RE by 2041. It also aims US$ 10 billion in RE generation by 2030, US$ 1.7 billion fossil fuel subsidy savings by 2030, around 12000 jobs by 2025 and around 40000 jobs by 2030. 1.5. Alignment with International Policies Environmental and Social safeguard policy of GCF In carrying out its mandate of promoting a paradigm shift towards low-emission and climate- resilient development pathways in the context of sustainable development, GCF effectively and equitably manages environmental and social risks and impacts and improve outcomes of all GCF financed activities. This is facilitated by a set of management processes and procedures that allow GCF to identify, analyze, avoid, minimize, and mitigate any potential adverse environmental and societal impacts of its activities, to maximize environmental and social benefits, and to consistently improve the environmental and societal performance of GCF and its activities over time. This system of processes and procedures is an overarching framework for improving environmental and societal outcomes while addressing any unintended adverse impacts of GCF-financed activities. GCF incorporates environmental and societal considerations into its decision-making and operations and identifies opportunities to “do good” and improve environmental and societal outcomes. The GCF Environment and Social Policy is an essential element of this system, elaborating the commitment of GCF to integrate environmental and social issues into its decision-making and outcomes, and establishes the principles, requirements, and responsibilities to deliver on these commitments. Through this policy, GCF will require that all GCF-supported activities will commit to enhancing equitable access to development benefits; and giving due consideration to vulnerable populations, groups, and individuals (including women, children, and people with disabilities, and people marginalized by virtue of their sexual orientation or gender identity), local communities, indigenous peoples, and other marginalized groups of people and individuals that are affected or potentially affected by GCF-financed activities. Page 8/54  Sustainable Finance Policy for Banks and Financial Institutions United Nations Framework Convention on Climate Change (UNFCCC), 1992 The UNFCCC entered into force on 21 March 1994. Today, it has near-universal membership. The 198 countries that have ratified the Convention are called Parties to the Convention. Preventing “dangerous” human interference with the climate system is the ultimate aim of the UNFCCC. The UNFCCC secretariat is the United Nations entity tasked with supporting the global response to the threat of climate change. The Convention is the parent treaty of the 2015 Paris Agreement. The main aim of the Paris Agreement is to ensure the global average temperature increase in this century is as close as possible to 1.5 degrees Celsius above pre-industrial levels. The UNFCCC is also the parent treaty of the Kyoto Protocol, 1997. The ultimate objective of all three agreements under the UNFCCC is to stabilize greenhouse gas concentrations in the atmosphere at a level that will prevent dangerous human interference with the climate system, within a time frame which allows ecosystems to adapt naturally and enables sustainable development. Article 11 of the UNFCCC and article 9 of the Paris Agreement described about the financial mechanism and modalities of climate financing instrument both for adaptation and mitigation. Sustainable finance and climate finance guideline should have direct linkage with the financial mechanism of UNFCCC and the article 9 of the Paris Agreement. Kyoto protocol, 1997 The Kyoto Protocol was adopted on 11 December 1997. Owing to a complex ratification process, it entered into force on 16 February 2005. Currently, there are 192 Parties to the Kyoto Protocol. In short, the Kyoto Protocol operationalize the UNCCC by committing industrialized countries and economies in transition to limit and reduces greenhouse gas (GHG) emissions in accordance with agreed individual targets. The Convention itself only asks those countries to adopt policies and measures on mitigation and to report periodically. The Kyoto Protocol is based on the principles and provisions of the Convention and follows its annex-based structure. It only binds developed countries, and places a heavier burden on them under the principle of “common but differentiated responsibility and respective capabilities”, because it recognizes that they are largely responsible for the current high levels of GHG emissions in the atmosphere. The Kyoto Protocol sets binding emission reduction targets for 37 industrialized countries and economies in transition and the European Union. Overall, these targets add up to an average 5 per cent emission reduction compared to 1990 levels over the five year period 2008–2012 (the first commitment period).In Doha, Qatar, on 8 December 2012, the Doha Amendment to the Kyoto Protocol was adopted for a second commitment period, starting in 2013 and lasting until 2020. As of 28 October 2020, 147 Parties deposited their instrument of acceptance; therefore, the threshold of 144 instruments of acceptance for entry into force of the Doha Amendment was achieved. The amendment entered into force on 31 December 2020. One important element of the Kyoto Protocol was the establishment of flexible market Page 9/54  Sustainable Finance Policy for Banks and Financial Institutions mechanisms, which are based on the trade of emissions permits. Under the Protocol, countries must meet their targets primarily through national measures. However, the Protocol also offers them an additional means to meet their targets by way of three market-based mechanisms. Kyoto Protocol facilitates the financing for climate change adaptation by supporting the Adaptation Fund. The Paris Agreement, 2015 In December 2015, at the 21st Conference of Parties (COP21) to the UNFCCC, Parties to the UNFCCC adopted the Paris Agreement, a global framework to tackle climate change. Through the Paris Agreement, all Parties acknowledged the need to contribute to achieving ambitious and collective goals to fight climate change. The Paris Agreement is the result of almost a decade of negotiations under the UNFCCC. A formal mandate was adopted in Durban in 2011 to “develop a protocol, another legal instrument or an agreed outcome with legal force under the Convention applicable to all Parties.” The Paris Agreement entered rapidly into force on 4 November 2016, within a year from its adoption in December 2015. This represents an unprecedented accomplishment for an international environmental agreement and marks a unique experience for UN treaties. It reinforces the renewed global commitment to addressing climate change and acknowledges the importance of countries place on an international framework. The mitigation goals of the Paris Agreement are set out in Article 2, to hold the increase in global average temperature to well below 2 degrees Celsius (°C) above pre-industrial levels and to pursue efforts to limit it to 1.5°C; and Article 4, to reach a balance between anthropogenic emissions by sources and removals of sinks of greenhouse gases (GHG) in the second half of the century, sometimes referred to as net zero emissions or carbon neutrality. The Paris Agreement also aims to increase Parties’ ability to adapt to the adverse impacts of climate change, foster climate resilience and low GHG emissions development, and make finance flows consistent with a pathway toward low GHG emissions and climate resilient development. The Global Reporting Initiative (GRI) Standards The GRI Standards are a modular system comprising three series of standards: the GRI Universal Standards, the GRI Sector Standards, and the GRI Topic Standards. These standards reflect global best practice for sustainability reporting, helping organizations respond to emerging information demands from stakeholders and regulators. These standards also help understand and reporting format to exhibit on the impacts on the economy and on environment and people in a comparable and credible way over time and in relation to other organizations, thus increases transparency on contribution to the sustainable development. Institutions can use the Standards to report on the impacts in a credible way that is comparable. The Standards also help stakeholders and authorities understand the report of the organization and can use the information in multiple ways. For example, the GRI Topic Standards contain disclosures for providing information on topics on sustainable finance and its impacts on society, economy climate and environment. Page 10/54  Sustainable Finance Policy for Banks and Financial Institutions The UN global Compact United Nations Global Compact simultaneously provides a policy platform and a practical framework for creating a sustainable and inclusive global economy with the alignment of business operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption. They address environmental risks and leverage opportunities; manage social impact and opportunities affecting employees; support the economic development of the country; and ensure sustainable development. Page 11/54  Sustainable Finance Policy for Banks and Financial Institutions Chapter-2: Sustainable Finance Taxonomy 2.1 Sustainable Finance Taxonomy means classification of Sustainable Finance. It is a structured mechanism for identifying and recognizing a product/a project/an initiative belongs to green and other products of Agriculture, MSME or Socially Responsible Financing Category linked to sustainability. Sustainable Finance Taxonomy includes not only Green Taxonomy but also Sustainable Finance Policy including CSR Policy, Economic and Governance (Good Governance and Green Governance), Green Finance based on (i) Climate Change Mitigation (ii) Climate Change Adaptation (iii) Other Environmentally sustainable Implementations and Impact on Inclusive Sustainable Green Growth. 2.2 Objectives/Focus/Purpose of Sustainable Finance Taxonomy Sustainable finance taxonomy has been structured in this Sustainable Finance Policyincorporating a green taxonomy containing green finance policy, CSR, SRF, agriculture and MSME all these issues related to green and sustainability. Sustainable finance frameworks are crucial for making future development more sustainable. Forming Sustainable Finance Taxonomy are very much essential and within the broader scope of sustainable development agenda of a country like Bangladesh. The policy actions and operations have been included in the taxonomy to provide a comprehensive understanding for concerned stakeholders regarding sustainable finance. 2.3 Features of Sustainable Finance Taxonomy Green Taxonomy Identification of Sustainable Linked Sustainable Agriculture, Finance MSME, Socially Disclosure Responsible Finance Identification Impact of other Assessment Finance linked /Review Sustainable to sustainability Finance Taxonomy R&D for Sustainable Product Innovation, Inclusion of Marketing, Technological Awareness & Advancement Capacity Building Sustainable Finance Screening & Strategic Monitoring Planning Page 12/54  Sustainable Finance Policy for Banks and Financial Institutions Sustainable Agriculture 2.3.1 Identification of Sustainable linked finance Sustainable MSME Socially Responsible Finance 2.3.1.1 Sustainable Agriculture Finance to Sustainable Agriculture is linked to Sustainable Finance. Sustainable Finance aims at promoting Sustainable Agriculture through climate change adaptation measures. Agriculture productivity needs to be enhanced especially in rain-fed areas focusing on integrated farming, soil health management, and synergizing resource conservation. Conservation agriculture by promoting location specific integrated/composite farming systems; soil and moisture conservation measures; comprehensive soil health management and rain-fed technologies can make agriculture sector more productive, sustainable, remunerative, and climate resilient. All these components of conservation agriculture have significant role in achieving SDGs. Sustainable Agriculture Sectors\Areas i. Crops ii. Pisciculture iii. Crop Storage iv. Livestock v. Poverty Alleviation vi. Irrigation Tools vii. Agricultural Tools viii. Others (time-to-time as recognized by BB) Along with the aforementioned products, financing for Integrated Farming System (IFS) in the specific sectors like horticulture, livestock, fishery, agro-forestry, apiculture etc. to enable farmers not only in maximizing farm returns for sustaining livelihood, but also to mitigate the impacts of drought, flood or other extreme weather events with the income opportunity from allied activities during crop damage. 2.3.1.2 Sustainable MSME Finance to Sustainable MSME (micro, small & medium as defined by SMESPD, BB) is linked to Sustainable Finance. Inclusive Sustainable Finance in MSME aims to advance financial inclusion among the most vulnerable by building resilience and enabling mitigation to climate change. This is especially the case for the transition to a low-carbon, circular and sustainable economy. Banks and FIs should have targeted initiatives to scale up finance for MSMEs, with a focus on specific sustainable/inclusive sectors. Sustainable linked MSME financing decisions upon environmental, social and governance (ESG) considerations will address issues of inequality, inclusiveness, investment in human capital and communities with respect to preservation of biodiversity, pollution prevention and circular economy. Banks and FIs should set priority areas financing to Sustainable MSME concentrating on Women entrepreneur based project financing, Rural Based business enterprises project Page 13/54  Sustainable Finance Policy for Banks and Financial Institutions financing, New entrepreneur project financing, Cluster Based project financing, Agricultural product processing industry, Helpless/ distressed/underprivileged/Marginal group/area-based project financing, Project Financing for the sustainability of Third gender, Physically/Mentally challenged person, Tribal people etc. A. Sustainable MSME industries/projects  Low Risk Rated (as per ESDD) Micro, Small and Medium enterprises financing with special focus to: (i) Herbal cosmetic manufacturing industries (ii) 100% local ingredients-based milk processing industry (iii) Handicrafts, Handloom and alike (iv) Agro feed manufacturing industry (v) Jute made products manufacturing industry (vi) Unani/Ayurvedic/Homeopathic manufacturing industries (vii) Rice processing industry (viii) Agro equipment manufacturing industry (ix) Production of bio pesticide, production of organic fertilizer (x) Bran wood projects (xi) Horticulture processing industry 2.3.1.3 Socially Responsible Financing Finance to Socially Responsible Products/Projects/Initiatives/Sectors is linked to Sustainable Finance. Socially Responsible Finance (SRF) is financing that supports actions mitigating or addressing a specific social issue and/or seeking to achieve positive social outcomes especially but not exclusively for a target population(s). SRF project categories include but are not limited to, providing and/or promoting affordable basic infrastructure, access to essential services (such as health and healthcare), affordable housing, employment generation through the potential effect of SME financing and microfinance, food security, and socioeconomic advancement and empowerment. Socially Responsible activities/projects linked to Sustainable Finance i. Financing/Investment through MFI (MRA Regulated)/NGO (Govt. Approved) Linkage Mode for capacity building, Education, employment generation including self employment ii. Financing in trading of green and agro products using ICT/online/e-business platform (as recognized by BB) iii. Financing in Orphanage/Child Rehabilitation Center/Old Age Home 2.3.2 Identification of other Sustainable linked finance 1. Low Risk Rated Projects/Initiatives using ESDD checklist (other than Green Finance, Sustainable Agriculture, Sustainable MSME, SRF and Working capital and demand loan of Green Products) 2. Working capital and demand loan of Green Products/projects/initiatives Page 14/54  Sustainable Finance Policy for Banks and Financial Institutions 2.3.3 Screening and Monitoring 2.3.3.1 Screening Setting of screening criteria is essential to avoid significant harm to climate change mitigation and adaptation, and to environmental and social harmony. The technical screening criteria will determine whether an activity can be considered to substantially contribute to one of the following six environmental objectives not doing any significantly harm to the other environmental objectives. Six environmental objectives- i. Climate change mitigation ii. Climate change adaptation iii. Sustainable protection of water and marine resources iv. Transition to a circular economy, waste prevention and recycling v. Pollution prevention and control vi. Protection and restoration of biodiversity and healthy ecosystems Performance thresholds- 1) Make a substantive contribution to one of six environmental objectives 2) Do No Significant Harm (DNSH) to the other five, where relevant; 3) Meet minimum social and governance safeguards 2.3.3.2 Steps of Screening All loan proposals will have to be first screened against the exclusion list. Screening Project that involves activities Project that involves activities listed under listed under Exclusion List=> Exclusion List=> Ineligible for Ineligible for Finance Sustainable Finance Yes Yes No Application of ESDD risk assessment tool as per ESRM guidelines along with Credit Finance will be rejected Risk Management guidelines issued by BB Page 15/54  Sustainable Finance Policy for Banks and Financial Institutions 2.3.3.3 Monitoring Monitoring must move on in a structured manner immediately after asset creation by the banks and FIs for the maintenance of the standard quality of the assets. Screening on Environmental, Social and Governance issue is essential for the pre-evaluation of a project with respect to sustainability, but the permanence in sustainability will only be ensured if stricter monitoring in both offsite and onsite manner is carried on with regular intervention. The purpose of monitoring a client's ESG performance (on the basis of ESDD risk assessment tool as per ESRM guideline) is to assess existing and emerging ESG risks associated with a client's operations during the transaction. Once a finance proposal has been approved, the Bank/FI needs to monitor the client’s ongoing compliance with the ESG clauses stipulated in the legal agreement. The monitoring process generally involves a review of periodic ESG performance reports submitted by the client and regular site visits of the client’s operations. Special attention should be paid to:  Assessing implementation of any mitigation measures specified in the corrective actionplan  Monitoring for valid ESG permits or licenses  Any fines and penalties for non-compliance with ESG regulations  Recent reports from the relevant regulator or inspection authority confirming compliance with specified laws, including any emissions measurements proving that emissions are below the permitted limits  ESG occurrences including major accidents or incidents associated with a client’s operations such as worker injuries and spills  Media attention to ESG issues related to the client  Any complaints submitted by stakeholders about a client If Bank/FI staff identifies ESG issues, such as a client’s non-compliance with the ESG clauses stipulated in the legal agreement, they should follow up with the client to resolve the issues without undue delay. 2.3.4 Inclusion of Technological Advancement Minimization of waste, emissions and reduction in materials and energy inputs are the most important environmental aims. Sustainable technological advancement and innovations have been playing a major role in the long-term initiation of sustainable production which ultimately facilitates sustainable growth. Sustainable finance taxonomy features include financing for the inclusion of technological advancement and innovations leading to sustainable production including Green Production or not yet recognized as green but definitely a sustainable one. Financing for technological inclusion and featured machineries/technologies include the followings- i. Core manufacturing/production ii. Energy efficiency and renewable energy iii. Business process engineering/Business process automation iv. Operations management Page 16/54