Funding decarbonization in Bangladesh: challenges, solutions, and the role of brands

According to a report by the Apparel Impact Institute (AII), US$1 trillion is required globally to decarbonize garment supply chains - with a significant portion required for Bangladesh. The challenges are multifaceted, from a heavy reliance on fossil fuels to inefficiencies within factory operations.

Addressing these issues requires both substantial funding and strategic planning. Here, I will look at the hurdles the Bangladeshi RMG sector faces, examine necessary funding avenues, and the potential solutions for a sustainable future.

Bangladesh’s current energy infrastructure heavily relies on fossil fuels like natural gas, oil, and coal. This dependency not only increases carbon emissions but also strains the country's economy due to high import costs. Adding to the problem, the limited rooftop solar capacity of many factories restricts the use of renewable energy sources. As a result, Bangladesh requires significant investment to shift away from a fossil-fuel-dependent grid and toward renewable energy sources.

Another key barrier to decarbonization in Bangladesh's RMG sector is the low energy efficiency in factory operations, particularly with steam systems. While Bangladesh has made strides in building green factories, these initiatives have not adequately addressed energy efficiency issues, which persist in equipment like compressors, air conditioners, and generators. Many of these machines are outdated and inefficient, leading to high energy consumption and increased fossil fuel reliance.

Replacing these inefficient systems with energy-efficient alternatives could reduce the sector’s overall energy demand and alleviate fossil fuel imports. However, this requires substantial investment.

Insufficient Access to Funding

Bangladesh has access to some funding facilities through organisations like the Infrastructure Development Company Limited (IDCOL) and the Bangladesh Bank. However, use of these funds remains low due to complex accessibility requirements. High entry barriers, such as stringent eligibility criteria, deter many factories from taking advantage of these resources.

Additionally, restrictions on foreign exchange loans by Bangladesh Bank further complicate funding, particularly for renewable energy and energy efficiency projects. These restrictions, while meant to control foreign exchange outflows, ultimately hinder initiatives that could reduce fossil fuel dependence.

Could Bangladesh Bank waive off restrictions for low interest decarbonization funds? This is one option.

To address all of these challenges, significant funding is required to revamp energy infrastructure, invest in renewable energy, and replace outdated machinery in factories. Bangladesh has already secured a US$250m allocation from the Green Climate Fund (GCF) to support renewable energy development, but much more is needed to achieve substantial decarbonization.

Below are some options:

Expanding Access to Foreign Funding and Creating Revolving Funds

Foreign direct investment (FDI) and funding from international development agencies can be pivotal in bridging the financial gap. These funds should ideally be converted into low-interest Bangladeshi Taka (BDT) loans to ease currency exchange pressures on the economy. Establishing these as revolving funds, where funds are repaid and reused within Bangladesh, will minimise foreign exchange outflows and provide long-term financial support for decarbonization projects. This structure would also alleviate concerns about currency fluctuations impacting loan repayment.

Brand Collaboration in Funding Decarbonization Efforts

Global apparel brands, as key stakeholders in the supply chain, can play a significant role in financing supplier decarbonization. By creating collective funds dedicated to supporting decarbonization, brands can directly contribute to the sustainability of the industry. These funds, if structured similarly to revolving funds, can reduce the forex burden on Bangladesh and make financing more accessible to suppliers. However, to ensure such funds are truly impactful, brands must recognise that their purchasing practices, pricing strategies, and order visibility affect the ability of suppliers to invest in decarbonization. Therefore, any funding initiative should also address these structural issues within the supply chain.

Derisking Funds Through Brand and Multilateral Guarantees

One effective way to boost the accessibility and affordability of funds is through derisking mechanisms. Multilateral organisations like the World Bank and Multilateral Investment Guarantee Agency (MIGA), along with brands, can provide guarantees on certain aspects of decarbonization funds. This approach makes the funds more attractive and affordable for local suppliers by reducing perceived risks, thereby encouraging greater participation. By derisking funds, the RMG sector can unlock more financing for renewable energy projects and energy efficiency upgrades.

Moving Beyond Debt-Based Funding Models

Many factories in Bangladesh already face high levels of debt and may be unable to take on additional loans. According to the Fashion Producer Collective’s whitepaper, alternative funding models that do not solely rely on debt are critical for the sector’s sustainability. This could include grants, equity investments, or shared savings agreements where brands and suppliers split the cost savings achieved through energy efficiency upgrades. Moving away from a debt-centric approach allows more factories to engage in decarbonization efforts without exacerbating financial strain.

Collaborative Development of Funding Methodologies

Programmes such as the Future Supplier Initiative by the Fashion Pact aim to support suppliers in their decarbonization journey. However, these programmes may lack the customisation necessary for Bangladesh’s unique context. A collaborative approach, where brands, funders, and manufacturers co-create methodologies, ensures funds are used efficiently and that projects are tailored to the actual needs of the RMG sector in Bangladesh. This cooperation will foster better results and avoid potential misallocation of resources.

Enhancing National Grid Capacity for Renewable Energy

Beyond factory-level improvements, Bangladesh must upgrade its national grid to accommodate renewable energy inputs. This requires not only funding but also policy reforms that enable investments in renewable infrastructure. Enabling policies will attract private investments, expedite renewable energy adoption, and facilitate the gradual shift from fossil fuels to more sustainable energy sources.

Decarbonizing Bangladesh’s RMG sector is a significant challenge. The industry must secure large-scale funding, with an emphasis on availability, accessibility, and affordability. By facilitating access to foreign and local funds, derisking investments, and promoting collaborative funding models, the sector can make meaningful strides toward sustainability. For these initiatives to succeed, however, brands, manufacturers, and financial institutions must work together to create a supportive ecosystem.

Mostafiz Uddin is the managing director of Denim Expert Limited. He is also the founder and CEO of Bangladesh Denim Expo and Bangladesh Apparel Exchange (BAE).