Bangladesh Bank to fund climate investment with forex reserves

Leading example of central bank support for green bond market

Lima: Governor of the Bangladesh Bank (BB) Dr Atiur Rahman announced at the annual World Bank-IMF meeting in Peru that the country’s central bank will invest a portion of foreign exchange reserves in green bonds. The central bank’s investment will focus on green bonds issued by multilaterals and other “highly rated financial corporates”. 

Bangladesh Bank has now become the first central bank to use their forex reserves to actively support the growth of the green bond market by providing strategic public investment. Exciting stuff! 

It’s fantastic to see the central bank being a front-runner on green bond action - although it’s not surprising. BB has been a pioneer in supporting sustainable development for some time; it already provides refinancing at preferential interest rates for loans given to policy priority areas, including renewable energy.

Central bank investment is one action available to governments

Central bank action is one of the innovative tools available to governments to scale green bond markets, as we set out in the Executive Briefing for the public sector on green bonds launched by Climate Bonds in conjunction with UNEP in early September.

Tools at central banks’ disposal to support green bonds include forex reserve investment – as demonstrated by Bangladesh - but also preferencing a green bonds component in bank operations and inclusion in asset purchasing programs.

The BB move opens the space for other central banks to take steps to support green bonds. In the emerging markets of Brazil and China, central banks have also realized that the urgency and severity of the climate challenge means broadening their legitimate and necessary role beyond inflation control. The People’s Bank of China now is leading China’s work on green bonds.

The recent speech on the risks of climate change from Bank of England governor Mark Carney indicates that the realization of the importance of climate change is spreading also to more conservative central banks in developed economies. Green bonds provide one opportunity for central banks to move into a more active stance on climate finance.

Full green bond guide for governments coming in November

Central bank operations are only one of a multitude of policy tools available to governments to help the growth of the green bond market.

The Climate Bonds/UNEP Executive Briefing provides an overview of potential actions for policymakers and regulators to scale up green bond markets.

Look out for the full report due in the lead up to COP21 in late November.