Without SME-friendly policies, green funds won't work

A news report published in The Daily Star early this month highlighted many factory owners’ struggle to access the much-heralded Green Transformation Fund (GTF). As a garment factory owner, the struggle felt uncomfortably familiar to me. Everyone agrees we must modernise. Everyone says “go green.” Yet, when a factory tries to invest, our financial system too often responds with delays, duplicated paperwork, and shifting requirements. If we, as garment makers, fail to shift to renewable energy and cleaner production, our customers will go elsewhere. That is the direction of travel in global sourcing.

Brands are setting climate targets, investors are asking questions and regulators are tightening rules on carbon claims. Buyers are increasingly demanding evidence from their supply chains, which include factories like mine. Bangladesh Bank’s Tk 10,000 crore GTF was meant to be a solution to many of the challenges factories face in accessing so-called green finance. Yet, SMEs struggle to access it, while larger, better-connected groups are more successful.

The 2024 white paper on financing highlighted three distinct dimensions: availability, accessibility, and affordability of funds. On paper, availability is not the core problem. Bangladesh does have green funds. The deeper issue is accessibility. Many facilities are effectively directed towards top-tier companies with scale, strong balance sheets, and the in-house expertise to navigate complex financial processes, including energy managers and corporate counsel to structure deals. Affordability is the third dimension, and it is critical. Interest rates are closely linked to credit ratings. SMEs, by definition, are more likely to face higher borrowing costs. Even where funds exist, the total cost of capital can make projects unviable.

At the same time, the cost of “going green” is real upfront. Consider the example of rooftop solar. This is often the first project factories consider when going green because it is visible, measurable and, in many cases, economically sensible. Global cost projections for rooftop solar photovoltaic (PV) systems show that around $530 per kilowatt is needed for investment, depending on system design and scale. For an industrial facility requiring several megawatts of capacity, that translates into significant capital expenditure. In a sector already squeezed by tight margins, volatile order books and rising compliance costs, that is not a minor decision.

Then there is the wider “green factory” push. Bangladesh is rightly proud of its LEED-certified garment factories and has become a global leader in the number of LEED-rated facilities. But building or upgrading to green standards can require 20 to 30 percent additional investment compared to conventional construction. For a large group with cheap capital, that may be manageable. But for an SME, the same can be prohibitive.

Meanwhile, the demands from brands know no end.

H&M has publicly stated ambitions to source 100 percent renewable electricity in its garment production supply chain by 2030, covering tiers 1 to 3, and has said it will not onboard new factories using on-site coal. Inditex expects at least 50 percent of the electricity used in manufacturing processes in its supply chain to come from renewable sources by 2030.

A large factory group can spread the cost of an energy manager, an environmental engineer, and a compliance team across multiple sites. An SME cannot. A large group can negotiate better loan terms, access corporate Power Purchase Agreements or co-invest with developers. An SME is often asked for hard collateral, bank guarantees, or even personal assets that are already pledged to banks.

Even when green investment pays back over time, the cash flow gap is the killer. You cannot tell a bank, “This will save energy in year three,” if you cannot survive year one. Nor can you promise a buyer renewable energy by 2030 if you cannot secure financing this year.

This is why credit guarantees are so critical, and why their design matters. If such facilities are structured as effectively risk-free instruments that only support the strongest borrowers, they will never reach those who actually need support. Credit risk guarantees must address multiple dimensions of risk.

First comes the risk of project implementation. SMEs may have lower technical capacity, fewer specialised staff, and less experience managing complex renewable installations. A well-designed guarantee should recognise this and incorporate technical assistance, not penalise it. Second, payment risk. SMEs often operate with thinner margins and more volatile cash flow. Guarantee structures must reflect the reality of vulnerable borrowers rather than assuming uniform repayment profiles. Third is interest rate risk. If interest rates remain high because of perceived credit risk, the entire logic of making a green transition collapses for SMEs. Charging high rates to finance decarbonisation undermines the purpose of climate finance.

If we are serious about implementation, several improvements are needed. Access must be simpler. Application and due diligence processes should be streamlined, with clear documentation requirements and predictable timelines. Factories should not face multiple layers of repetitive scrutiny from different agencies for the same project.

Risk sharing must be realistic. Finance should not be designed only for the perfect borrower with the perfect project and a ribbon tied around it. SMEs with credible, well-structured projects should have a viable route to funding even if their balance sheets are smaller. Verification requirements should also be proportionate. For some schemes, including projects financed through Infrastructure Development Company Limited (IDCOL), factories are required to report onerous proof-of-performance and face penalties if external auditors disagree on measured outcomes. Excessive post-project verification increases uncertainty and hidden costs.

Moreover, the total cost of capital must be reduced. Beyond nominal interest rates, there are transaction costs, consultancy fees, monitoring expenses and ongoing reporting requirements. Collateral requirements must also be reconsidered. Alternative approaches, including partial guarantees or cash flow-based lending, should be explored.

Bangladesh has the opportunity to use renewables efficiently to strengthen competitiveness, cut exposure to volatile fuel prices, and meet buyer expectations. But the pathway must work for the majority of factories, not just the largest ones. Brands, too, must share responsibility. If buyers want supplier decarbonisation, they should support longer-term commitments, co-financing mechanisms and credible structures that help suppliers secure capital.

Climate and competitiveness are now inseparable. If we delay for another two or three years, the market will not wait. If one sourcing country cannot offer a credible pathway to renewable energy and lower emissions, another will. If we can get this right, we can protect jobs, attract long-term customers, and build resilience. If we get it wrong, we will keep talking about “green transformation” while orders move elsewhere.

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).

Views expressed in this article are the author's own. 

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