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Mostafa Monira Firdouse, Green Finance Advisor of Friends of the Earth (HK)
The
garments sector is a big deal for Bangladesh’s economy, providing jobs for
millions and contributing more than 11% to the GDP. Thanks to its competitive
labour, trade preferences and market liberalisation following WTO membership.
Many foreign investors, including those from Hong Kong, have set up garment
factories in Bangladesh. This gives rise to sustained demand for textile
imports, making them among the leading export markets for Hong Kong.
But with great power comes great responsibility, and the
sector has been under the microscope for its environmental, social, and
governance (ESG) practices. As the world gets more serious about sustainable
and ethical fashion, it’s crucial for Bangladesh’s garments sector to step up
its ESG game. Such as:
The garments industry needs to get efficient to
use resources. This means using water and energy efficiently, cutting down on
waste, and avoiding harmful chemicals. Cleaner production techniques and
sticking to environmental laws are a must.
Worker Empowerment, strong health and safety
measures through training and development programs. Such as offering skill
development opportunities, promoting gender equality, and giving workers a
voice in decision-making.
To
meet the sustainable practice mainly depends on (i) implementing robust policy
by government and by companies. (ii) Investing in technology and innovation
(iii) skill development.
Hong Kong, with its advanced financial markets, strong regulatory frameworks, and expertise in sustainable practices, is in a great position to support ESG capacity building in Bangladesh’s garments sector. Here are several ways Hong Kong can help:
Knowledge Transfer and Training
Workshops and Seminars: Organize events in Bangladesh to share best practices in ESG, covering topics like sustainable resource management, labor rights, and corporate governance.
Training Programs: Set up training programs for Bangladeshi garment industry professionals, run by Hong Kong-based experts, focusing on practical ESG skills.
Technical Assistance and Consultancy
ESG Consultancy Services: Hong Kong-based firms can help develop and implement ESG strategies, conduct audits, and provide guidance on international standards.
Technical Support: Provide support for adopting advanced technologies that enhance sustainability, like energy-efficient machinery and water recycling systems.
Financial Support and Investment
Green Financing: Offer green financing options like green bonds and sustainability-linked loans to Bangladeshi garment manufacturers.
Investment in ESG Projects: Encourage Hong Kong investors to fund ESG-focused projects in Bangladesh, including renewable energy and sustainable textile production.
Collaboration and Partnerships
Industry Partnerships: Foster partnerships between Hong Kong and Bangladeshi garment industry associations to exchange knowledge and best practices.
Academic Collaboration: Promote joint research projects between universities and research institutions in both regions.
Policy Advocacy and Support
Policy Development: Help the Bangladeshi government create policies that promote ESG practices, including regulatory frameworks and incentives.
Advocacy for International Standards: Support Bangladesh in adopting international ESG standards through global forums.
Capacity Building Initiatives
Programs: Develop capacity building programs tailored to the Bangladeshi garments sector, focusing on environmental management, social responsibility, and corporate governance.
Mentorship and Coaching: Set up mentorship programs where Hong Kong professionals mentor Bangladeshi counterparts.
Monitoring and Evaluation
Performance Monitoring: Help set up systems for monitoring and evaluating ESG performance, including key performance indicators (KPIs) and reporting frameworks.
Third-Party Audits: Facilitate third-party audits to ensure compliance with international ESG standards.
Conclusion
Hong
Kong can play a big role in helping Bangladesh’s garments sector improve its
ESG practices. Through knowledge transfer, technical assistance, financial
support, collaboration, policy advocacy, capacity building initiatives, and
monitoring and evaluation, Hong Kong can help Bangladesh become more
sustainable and ethical. This collaboration can lead to a better garments
industry in Bangladesh, benefiting workers, communities, and the environment
while strengthening economic ties between the two regions.
The energy
transition is a global challenge, but when it comes to financing, not all
regions are on equal footing. While investments in clean energy continue to
grow in advanced economies, emerging markets and developing economies (EMDEs)
are being left further behind.
This
growing disparity between regions threatens to undermine global climate goals, leaving
billions of people increasingly vulnerable to the worsening impacts of climate
change and energy insecurity.
In this
post, we explore the regional investment gap, the barriers hindering progress
in EMDEs, and how green finance can help level the playing field.
A
World of Unequal Investment
The International Monetary Fund’s World Economic Outlook database divides the world into advanced economies and emerging market and developing economies, based on the main criteria of 1) per capita income level, 2) export diversification and 3) degree of integration into the global financial system.
Emerging markets and developing
economies account for the majority of the global population, yet receive only a
small share of global clean energy investment.
The share of clean energy investment
in emerging market and developing economies outside of China accounted for just
15% of the total, even though these economies account for two-thirds of the
global population and one-third of global GDP, according to the International
Energy Agency (IEA)World Energy Outlook 2024.
Investment in clean energy projects
increases in all parts of the world in the IEA’s Net Zero Emissions by 2050 (NZE)
Scenario, but the regional imbalances mean that the required increase is
particularly steep in emerging market and developing economies other than
China.
In the NZE Scenario, annual spending on clean energy doubles in advanced economies as well as China by 2035 compared with 2023 levels. For other developing economies, clean energy investment needs to grow more than six-fold during the same period.
Source: IEA World Energy Outlook
2024
This means that achieving the Net Zero Emissions by 2050 (NZE) scenario
requires a dramatic increase in clean energy investments in EMDEs, where the
needs are the greatest.
However, several barriers hinder
investment in EMDEs. Political instability, weak regulatory frameworks, and
currency volatility make projects in these regions riskier for investors.
Access to affordable capital remains one of the largest barriers to investment
in clean energy projects and infrastructure in many EMDEs, with financing costs
in these regions at least twice as high as in advanced economies and China, according
to the IEA’s World Energy Investment 2024 report.
The lack of local-currency lending
pushes up borrowing costs, and high hedging costs often make this financing
unaffordable to many of the least-developed countries, according to the IEA.
Many EMDEs also lack the grid
infrastructure needed to integrate renewable energy at scale, while inconsistent
or unclear energy policies create uncertainty that deters private investment.
Without targeted action, these
challenges will deepen the divide between developed and developing economies,
slowing the global energy transition. International collaboration will be
essential to mobilise the necessary investments in these regions.
How
Green Finance Can Bridge the Gap
To close the investment gap in
EMDEs, green finance must play a central role. Here are some key solutions that
could bridge the gap:
Blended finance mechanisms can reduce risks for private investors in EMDEs by
combining public and private capital. For example, concessional loans from
development banks can make projects in high-risk regions more attractive to
private investors.
International climate funds like the Green Climate
Fund (GCF) and
the Climate Investment Funds (CIF) are designed to channel funding to countries and sectors
most in need. These funds help EMDEs finance renewable energy projects, grid
upgrades, and energy access initiatives.
Policy and regulatory support from governments in EMDEs can attract investment by
creating stable, transparent regulatory environments. Policies like feed-in
tariffs and tax incentives, as well as power purchase agreements, can reduce
investor uncertainty.
Private sector engagement is crucial, with institutional investors such as pension
funds and asset managers increasingly allocating capital toward sustainable
investments. Encouraging more private sector participation in EMDEs will be
critical to scaling clean energy financing.
Capacity building is essential. Beyond financing, EMDEs need technical
assistance to develop bankable clean energy projects. International
organisations and development banks can provide expertise to help countries
design and implement effective projects.
The
Cost of Inaction
Failing to close the investment gaps
in EMDEs will have global consequences. Without sufficient funding, these
regions risk being locked into fossil fuel dependency, which would make it
virtually impossible to achieve global climate targets. Furthermore, the energy
inequities between developed and developing economies would deepen, leaving billions
without access to clean and affordable energy.
Green finance offers a pathway to
address these disparities. By mobilising capital at scale and directing it
toward high-impact projects in EMDEs, the world can ensure that no region is
left behind in the energy transition.
Key Takeaways:
EMDEs
outside China receive only 15% of global clean energy investment despite
representing two-thirds of the global population
Investment
in clean energy must grow more than six-fold in developing economies (excluding
China) by 2035 to meet net-zero goals
Policy
reforms and capacity building are crucial for attracting private investment
into EMDEs
Looking
Ahead
The investment gap is just one piece
of the puzzle. In the next post, we’ll explore how green finance is driving the
rapid expansion of renewable energy, from solar farms to wind turbines, and the
critical infrastructure upgrades needed to support them.
Stay tuned as we continue to uncover
the transformative power of green finance in achieving the global energy
transition.
Green Finance Advisor of Friends of the Earth (HK)
Introduction
Climate change presents significant risks to the global
economy, prompting investors to seek portfolios that effectively hedge against
such risks. The financial services industry has responded by developing
numerous funds with climate mandates. This paper introduces a methodology for
constructing climate-efficient factor-mimicking portfolios (CEPs) designed to
hedge climate risk.
Methodology
The authors propose a two-step approach to forming these
hedging portfolios:
1. Climate Risk Index Construction: Using textual
analysis of major newspapers, the authors construct climate risk indices that
capture the sentiment and information regarding climate change.
2. Factor-Mimicking Portfolio Creation: The paper
presents a novel method for computing factor-mimicking portfolios, enhancing
traditional approaches by utilizing large-dimensional covariance matrix
estimators, which improve efficiency in short sample sizes.
Empirical Analysis
The authors conduct extensive empirical tests to demonstrate
the superior performance of CEPs. The findings indicate that these portfolios
yield significantly higher and statistically meaningful alphas (excess returns)
and betas (sensitivity to climate risk indices) when compared to traditional
investment strategies.
Climate Risk and Investment Strategies
Investors increasingly recognize climate change as a
non-diversifiable risk, complicating traditional hedging methods such as
futures or insurance contracts. The paper emphasizes the need for investors to
self-insure through carefully constructed investment portfolios. The proposed
CEPs are designed to minimize variance while maximizing exposure to climate
risk, achieved through a sophisticated portfolio optimization framework.
Performance Metrics
The authors measure the effectiveness of the
climate-efficient portfolios using several performance metrics, including:
– Alpha: Represents the portfolio’s excess return beyond the
expected return.
– Beta: Indicates the portfolio’s sensitivity to climate
risk news.
– Information Ratio (IR): Measures the risk-adjusted return
of the portfolio.
The results show that CEPs outperform various benchmarks,
confirming their robustness and effectiveness in managing climate risk.
Portfolio Construction
The construction of CEPs involves selecting sustainable and
climate-focused funds, with the process guided by the estimated covariance
matrix of asset returns. The paper introduces the use of shrinkage estimators
to enhance the stability of covariance estimates, particularly in scenarios
with a limited number of observations.
Results and Findings
The empirical analysis reveals that the CEP approach
consistently outperforms traditional portfolios. Specifically, the optimal CEP
achieves an average excess return of 7.34% with a corresponding beta of 3.30.
The performance is robust across different time frames and market conditions,
showcasing the effectiveness of the proposed methodology.
Conclusion
The authors conclude that their climate-efficient
factor-mimicking portfolios offer a powerful tool for investors looking to
hedge against climate change-related risks. By combining advanced portfolio
optimization techniques with a rigorous understanding of climate risk dynamics,
the CEP approach delivers significant advantages over conventional investment
strategies.
Implications for Investors
The findings underscore the importance of adopting
innovative investment strategies that account for climate risks. As awareness
of climate change continues to grow, investors are likely to demand more
sophisticated financial products that facilitate effective risk management. The
CEP framework not only addresses this need but also positions investors to
better navigate the complexities of climate-related financial challenges.
In summary, the paper presents a thorough examination of
factor-mimicking portfolios tailored for climate risk, advancing the field of
sustainable finance by providing a practical solution for investors.
Friends of the Earth (Hong Kong) is proud to announce that our Vice Chairperson and Green Finance Convenor, Mr Anthony Cheung, has been appointed as a member of the Independent Standards Board (ISB) of the Greenhouse Gas Protocol (GHGP).
This appointment marks a significant milestone not only for Mr Cheung but also for Hong Kong’s growing presence in the global sustainability landscape.
Global Standards with Far-Reaching Impact
The GHGP is the organisation behind the world’s most widely used greenhouse gas accounting standards. Its classification framework has become the foundation for virtually all emissions calculation methodologies used today, most notably the Scope 1, 2, and 3 emissions categories:
· Scope 1: Direct emissions from owned or controlled sources
· Scope 2: Indirect emissions from purchased electricity
· Scope 3: All other indirect emissions occurring in a company’s value chain
These categories have been adopted globally by corporations, governments, and organisations as the standard approach to carbon accounting and reporting.
The Role of the Independent Standards Board
The Independent Standards Board comprises leading global experts in climate science, corporate sustainability, and environmental policy. As the GHGP’s decision-making entity, the ISB will:
· Oversee the standards development process
· Review and approve GHG Protocol Standards
· Make decisions related to the content of standards
Mr Cheung joins this distinguished group at a crucial time when greenhouse gas accounting standards are becoming increasingly important for global climate action.
Bridging Hong Kong with Global Standards
“This appointment represents a significant opportunity to align Hong Kong’s sustainability standards with international frameworks,” said Mr Cheung. “I look forward to bringing Hong Kong and mainland China’s perspectives to the global stage, ensuring our regional context is considered in the development of universal standards.”
Mr Cheung’s appointment comes as Hong Kong continues to develop as a green finance hub in Asia. His position on the ISB will help facilitate knowledge exchange between local practices and global standards, supporting Hong Kong’s transition to a low-carbon economy
while ensuring that local businesses can seamlessly integrate with international sustainability reporting requirements.
Looking Forward
As climate reporting becomes increasingly standardised worldwide, having Hong Kong representation at this high level ensures our region’s voice is heard in shaping the future of global carbon accounting frameworks.
We congratulate Mr Cheung on this prestigious appointment and look forward to the positive impact his expertise will bring to both global standards development and Hong Kong’s sustainability journey.
For more information about the Greenhouse Gas Protocol and its standards, visit https://ghgprotocol.org/
