Key policies and governance approach

The State Bank of Pakistan (SBP) has played a crucial role in Pakistan’s sustainable finance journey. Since 2009, SBP has introduced various conventional as well as Islamic refinance schemes, with varying scope, for financing projects that use renewable energy. The schemes aim at providing financing to address climate change and energy shortages through the promotion of renewable energy. As of Feb-22, total disbursements of PKR 79.7 billion have been made under the SBP Financing Scheme for Renewable Energy [6].

In 2015, SBP joined the Sustainable Banking and Finance Network (SBFN). Additionally, in the same year, in collaboration with the International Finance Corporation, SBP also conducted an environmental and social risk management survey for the financial sector of Pakistan and published a Green Banking Concept paper to raise awareness about green banking in the industry [6].

Following this, in 2017, SBP issued Guidelines on Green Banking, which aimed at safeguarding Pakistan’s financial institutions against environmental and climate change risks. It also aimed to facilitate the investment of financial institutions in energy-efficient projects. The Guidelines covered three main areas (i) risk management, (ii) business facilitation, and (iii) reducing the impact on the environment and society [6]. Additionally, the Government of Pakistan and UNDP published the Pakistan Climate Change Financing Framework: A Road Map to Systemically Mainstream Climate Change into Public Economic and Financial Management in 2017 [9].

In 2018, SBP issued the Guidelines on Environmental and Social Risk Management (ESRM) Policy and Procedures for Microfinance Banks (MFBs), Non-Bank Microfinance Companies and Non-Bank Finance Companies in Pakistan [9]. The main objectives of the policy for the participating financial institutions were to (a) set out applicable Environmental & Social (E&S) requirements for all business activities, (b) strengthen their Environmental and Social Management Systems (ESMS), (c) fully implement and comply with national requirements for E&S risk management, and (d) promote greater transparency and accountability on E&S issues [6].

In 2021, the Securities and Exchange Commission of Pakistan issued the Green Bonds Guidelines for the corporate sector to raise funds from the capital market to finance or refinance projects that contribute positively to the environment. Pakistan’s national framework for financing sustainability is led by SBP’s Green Banking Guidelines (2017) and the Securities and Exchange Commission of Pakistan’s Green Bond Guidelines (2021). The SBP monitors the implementation of Pakistan’s sustainable finance framework and provides regulatory guidance to enhance knowledge and capacity of financial institutions on Environmental, Social, and Governance (ESG) and climate risk management [9].

More recently, as part of SBP’s ongoing efforts to promote green banking in Pakistan, the SBP launched the Environmental and Social Risk Management (ESRM) Implementation Manual in November 2022 to support banks/Development Finance Institutions (DFIs) to establish their ESRM systems [1].

Successes and remaining challenges

SBP has been monitoring the implementation of its Green Banking Guidelines (2017) by banks and DFIs and the progress that has been made has been promising. As of November 2022, as outlined in a keynote address by Mr Jameel Ahmad, Governor of the State Bank of Pakistan: (i) all Banks and DFIs have established Green Banking Offices and nominated chief green banking managers to supervise Green Banking activities; (ii) 31 banks and DFIs (79%) have formulated Green Banking Polices that have been approved by their respective Boards. These policies include policy statements on environmental risk management, facilitation of green businesses, and reduction in their own carbon emissions; (iii) 27 banks and DFIs (69%) have integrated environmental risk assessment procedures with their credit risk assessment procedures to better evaluate and manage the impact of environmental and climate changes on their credit portfolios; (iv) 16 banks and DFIs (41%) have established strategies for facilitation of green businesses by including a policy statement for allocating funds to businesses that intend to lessen their carbon footprint; and (v) 18 banks and DFIs (46%) have established annual impact reduction targets including well-defined key performance indicators and strategic plans for achievement of these targets [10].

However, while considerable progress has been made, there is still a varying degree of implementation across the industry, as well as a lack of standardization in assessing and identifying environmental risks. To overcome these challenges, the SBP issued the Environmental and Social Risk Management (ESRM) Implementation Manual for Banks and DFIs in November 2022. Further, SBP’s next milestone will be the development of a "National Green Taxonomy" in coordination with relevant stakeholders. This will support financial institutions in identifying and financing green projects and reporting their green finance portfolios to SBP and the public. This will also lay-out the groundwork for development of the green bond and Sukuk market in Pakistan [10].

Initiatives and Development Plans

Green bonds are an increasingly important climate financing instrument worldwide but relatively new in Pakistan.  In 2021, the Water and Power Development Authority (WAPDA) launched the country's first-ever 10-year green bonds and so far, has raised US$500 million to support hydropower generation. Given the encouraging market response, WAPDA is considering launching additional green bonds. Pakistan may also launch additional bonds in other sectors [11].