The financial landscape is undergoing a significant shift, with sustainability emerging as a strategic priority. This is best illustrated by the remarkable growth in sustainable bond issuance, which reached $1 trillion in 2024. This growth, largely fueled by green and sustainability bonds, now accounts for approximately 12% of the global bond market. This trend signifies a fundamental re-evaluation of capital, where financial returns are increasingly intertwined with environmental, social, and governance (ESG) performance.
The global trend towards sustainable finance may seem like a distraction from more pressing concerns in Bangladesh's banking sector. While the primary driver of the country's economy and representing 88 percent of total financial sector assets and 50 percent of GDP, the banking sector is currently facing a confluence of severe challenges that pose a significant threat to financial stability and broader economic growth. A key indicator of this distress is the Capital to Risk-Weighted Asset Ratio (CRAR), which plummeted to just 3.08% at the end of 2024. This is a far cry from the Basel III minimum requirement of 10% plus a 2.5% buffer and is significantly lower than neighboring countries like India (16.7%), Sri Lanka (18.4%), and Pakistan (20.6%). The capital shortfall is a direct result of an escalating volume of non-performing loans (NPLs), which reached a staggering 24.13% by the end of March 2025. These bad loans, amounting to over BDT 4.20 trillion ($38 billion), force banks to set aside massive provisions, eroding their capital and profitability.
The underlying causes of these financial issues are deep-rooted problems of poor corporate governance. News sources and experts have consistently pointed to past loan scams, malpractices, and politically-motivated lending, which have allowed influential borrowers to default with impunity. This breakdown of accountability has severely damaged public confidence. In response, a new government and central bank administration have acknowledged these issues and have started to implement reforms, including restructuring the boards of troubled banks and initiating a merger process for weaker institutions. Amidst this alarming narrative, the question remains: where does sustainability fit in?
Sustainability's role in the Bangladeshi banking sector becomes clear when approached from three perspectives: as a long-standing policy objective, a potential solution to systemic governance and risk management failures, and a way to improve profitability by serving a growing segment of customers who value sustainability.
Sustainability as a Policy Objective
Since 2011, Bangladesh Bank has been a pioneering force in promoting sustainable finance. The central bank's commitment began with its 2011 Environmental Risk Management (ERM) Guidelines and Green Banking Policy, which established a strong foundation for responsible banking practices. Over the years, this framework has expanded significantly through a series of directives and the establishment of a dedicated Sustainable Finance Department (SFD). These comprehensive guidelines require financial institutions to green their internal operations, assess environmental and social risks in their credit analysis, and meet specific targets for green financing in sectors like renewable energy and waste management, supported by dedicated refinancing schemes and funds (e.g., the Green Transformation Fund). A major recent step, initiated in 2024, is the mandate for banks to begin disclosing sustainability and climate-related financial information. This aligns with global IFRS S1 and S2 standards, which are compliant with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), firmly positioning sustainability as a core, not optional, component of the country’s banking policy. Integrating sustainability, therefore, supports regulatory compliance with evolving local and global standards.
Sustainability as a Solution to Systemic Crisis
Beyond a policy objective, sustainability can be a powerful tool for fixing the deep-seated governance problems within the banking sector. When governance is lacking, sustainability guidelines are often treated as a mere compliance checklist rather than a core component of risk underwriting. In such an environment, loans aren't adequately scrutinized for their environmental and social effects, which creates a negative feedback loop of financial and non-financial risk, as financially unsound practices often go hand-in-hand with poor sustainability outcomes.
By embedding ESG principles into core banking operations, banks can directly address these issues and create a more transparent, accountable, and forward-looking risk management system. This can be achieved by tying financial instruments, like debt or equity offerings, to specific governance outcomes. This creates a direct financial incentive for a bank to improve its governance (e.g., increasing board independence or transparency), turning the act of raising capital into a mechanism for internal reform. This can also extend to wider social or environmental goals through instruments like green, social, and blue bonds.
Furthermore, ESG integration enhances a bank's governance by promoting transparency and proactive risk management. It requires the public disclosure of a bank's non-financial performance, allowing for greater scrutiny by investors and regulators and holding management accountable. A bank's governance framework is also forced to proactively manage non-traditional risks like climate change, social unrest, and corruption, moving away from a reactive model by establishing new committees, dedicated roles, and clear lines of authority to address these non-traditional risks.
This improved risk assessment could help banks reduce exposure to high-risk entities and directly addresses the core issue of soaring NPLs. The resulting improvements in asset quality would reduce the need for provisions, which will strengthen the bank's capital base and raise its CRAR. Additionally, issuing sustainable bonds diversifies funding sources, attracts a new class of socially conscious global investors, and provides a pathway to rebuild capital.
Sustainability as a Driver of Profitability
Beyond regulatory compliance and risk management, sustainability presents a powerful opportunity for banks to improve their financial performance and secure a competitive advantage.
By developing specialized sustainable financial products, such as loans for solar installations or electric vehicle purchase for retail clients or sustainability performance-linked loans for corporations, banks can access new, profitable market segments. These products create a win-win scenario: borrowers receive financial incentives like lower interest rates for meeting sustainability targets, while banks reduce their own Scope 3 emissions—the indirect emissions from their lending activities which are often the most significant source of banks’ carbon footprint. This approach transforms sustainability from a compliance burden into a core business strategy that fosters mutual financial stability and growth.
Assurance: The Path Forward
While the challenges facing Bangladesh's banking sector are daunting, they are not insurmountable. The path to recovery lies not in abandoning global trends but in strategically leveraging them. Sustainability is more than a policy directive or a peripheral concern; it is a powerful framework for systemic reform, especially for a climate vulnerable country like Bangladesh. By embedding sustainability principles into core operations, banks can directly address the root causes of their current crisis, namely poor governance and high NPLs. This approach not only strengthens capital and improves asset quality but also unlocks new avenues for profitability and growth.
However, a critical challenge remains: ensuring the credibility of these initiatives. The risk of greenwashing or sustainability washing is real, where banks set easy, non-ambitious targets to gain favorable financing without making meaningful change. To counter this, a robust framework for external verification and independent reporting is not merely essential—it is imperative. This will ensure that sustainability becomes a credible, effective commercial strategy for restoring market confidence, attracting foreign capital, and securing long-term financial stability.