The financial sector plays a crucial role in promoting environmentally sustainable and socially responsible investment. Pakistan has set a target of a 50 per cent reduction in its projected greenhouse gas (GHG) emissions by 2030 — 15pc from the country’s resources and 35pc subject to the provision of international finance amounting to $101 billion for the clean energy transition.

This requires the country to increase the share of clean, renewable energy to 60pc in its total energy mix and boost electric vehicle (EV) adoption to 30pc of the total vehicles sold by 2030.

However, new explorative research on ‘Facilitating Green Loans for Sustainable Energy Transition: The Case of Distributed Solar PV (DSPV) and EV Lending in Pakistan’ finds that green financing is in its infancy due to various barriers.

The study, co-authored by Rimsha Rehan of the Policy Research Institute for Equitable Development (PRIED) and Naila Saleh of Agora Energiewende, highlights that the uptake of green loans for solar energy and EVs remains weak due to several policy, regulatory and market barriers, as well as risks for banks associated with this kind of financing.

Banks’ reluctance to finance green loans and wariness towards EVs is stalling the sustainability drive

The study highlights that the tailored concessionary financing scheme introduced by the State Bank of Pakistan (SBP) in 2016 to encourage the adoption of solar energy has not had much of an impact because banks have shown little interest — only 41pc banks actually participated in the scheme.

The SBP also discontinued allocations to banks under this facility in 2021 owing to restrictions imposed by the amended SBP Act Section 20(5A), prohibiting quasi-fiscal operations. Many banks have already utilised their quotas for renewable energy financing, resulting in the cessation of financing under this facility. The study notes that restricted public access to data on the scheme’s disbursement hampers a clear understanding of its overall impact and effectiveness.

Likewise, the National Electric Vehicle Policy developed in June 2021 to propel faster adoption of EVs remains unimplemented. Last year, the industries ministry developed a tailored concessionary financing scheme for e-bikes and e-rickshaws to push their adoption. Unfortunately, the scheme was never implemented despite the approval of a subsidy for up to 15,000 e-bikes/e-rickshaws.

The study contends that challenges like implementation lags, regulatory shortcomings, and complex bureaucratic processes have prevented the adoption of green products despite the introduction of tailored financing facilities. The majority of banks’ reluctance to extend financing for EVs and solar energy indicates a large delivery gap in the market. Green lending options are available, but execution and access issues persist.

“According to most banks, green lending entails high risk and offers low returns. This apprehension stems largely from concerns about default risk, the absence of secondary markets for resale value, and the high transaction cost of processing loans. These concerns act as significant barriers, limiting the widespread adoption of the scheme,” the study highlights.

Zafar Masud, President and CEO of Bank of Punjab, agrees that green finance is critical to the effective adoption of environmentally friendly technologies in any economy. “The massive funding requirement for this can’t be met by the public sector alone. The private sector needs to play its due role in this endeavour. Climate mitigation technologies require a larger upfront capital outlay with the benefit of reduced operating costs,” he says.

But, according to him, the financing issues in solar systems and EVs arise due to reluctance from both the lenders and the borrowers. “Initially, consumers are reluctant to acquire solar and EV financing due to high initial cost, lack of knowledge, battery insurance issues, lack of charging infrastructure, under-developed local allied industries, concerns over maintenance and resale in the case of EV vehicles and so on.”

Furthermore, Rimsha Rehan explains that effective risk-sharing mechanisms and formal secondary markets for renewable energy products must be established to address banks’ concerns regarding the risks of defaults in renewable energy financing. A vibrant secondary market for green assets is paramount to mitigate banks’ risk.

She points out that Pakistan can explore innovative financing mechanisms such as green bonds, revolving funds, and specialised financing models with favourable terms to encourage participation like other nations.

“Bangladesh’s solar home system programme employs a public-private partnership model with a dedicated credit line from international financial institutions and extending social collateral to consumers as a risk mitigation tool. In India, the Surya Shakti Scheme and the Grid Connected Solar Rooftop Programme exemplify effective public-private partnerships and a balanced approach, offering practical models for sustainable development.”

Dr Naveed Arshad, an associate professor at the Lahore University of Management Science, laments that Pakistan has so far been able to tap just $179 million in global climate finance. Even the Maldives, despite its small size, have garnered $152m in global climate finance.

“We can leverage global concessional climate finance to meet targets for emissions reduction, but that requires an innovative strategy and a convincing business plan to finance the energy transition,” he says.

Published in Dawn, The Business and Finance Weekly, May 20th, 2024