Hasan

As Pakistan’s green loan portfolio expands, experts say the country can scale up green lending by adapting key features of China’s coordinated green finance model, including clear regulatory direction, unified classification standards, and centralized monitoring.

Green loans are specialized financial instruments that fund projects with measurable environmental benefits, such as renewable energy, energy efficiency, electric mobility, and climate-resilient agriculture.

Pakistan’s green financing has gained traction in recent years. The State Bank of Pakistan’s Renewable Energy Refinance Scheme has disbursed Rs94.7 billion by end-June 2024, supporting more than 4,500 renewable energy projects with a combined capacity of nearly 2,061 megawatts. However, experts say that while growth is visible, structural weaknesses continue to limit long-term sustainability.

Maryam Naqvi, Senior Research Analyst at The KPI Institute, Australia, told Wealth Pakistan that one of the main barriers to scaling up green loans in Pakistan is the absence of a unified national green taxonomy.

“A lack of a unified green taxonomy that clearly defines what qualifies as ‘green’ creates uncertainty for banks and investors,” she said.

A green taxonomy sets out clear criteria for what activities qualify as environmentally sustainable. Naqvi emphasized that China’s green loan success was built on establishing such clear definitions early on, backed by strong central bank guidance.

Linking Pakistan’s needs to China’s approach, she said China aligned green finance with its national development strategy through clear regulatory direction from the central bank and mandatory environmental disclosure requirements. These measures improved transparency and investor confidence. She added that China also introduced performance-linked incentives for banks, including preferential capital treatment and policy support, which accelerated green credit growth.

She urged Pakistan to pursue similar regulatory alignment through the State Bank of Pakistan, integrate climate risk into prudential regulations, and introduce incentives that de-risk green lending.

On measurement, reporting, and verification (MRV), Naqvi noted that Pakistan’s systems remain at an early stage. MRV refers to standardized reporting, digitized environmental data systems, and independent third-party verification mechanisms used to classify and monitor green loans.

She said China strengthened its green loan framework through mandatory disclosure and structured monitoring, which enhanced credibility. Pakistan, she stressed, should adopt standardized reporting frameworks aligned with international climate finance standards and ensure independent third-party verification.

Dr. Bakht Bilal Khan, Head of Business Development & Climate Action at WeatherWalay, told Wealth Pakistan that the core market challenge in Pakistan is not a lack of capital, but a shortage of bankable climate projects.

“Many climate investments have uncertain revenues, weak preparation, and limited access to guarantees or insurance, so banks view them as high-risk,” he said.

Referring to China’s experience, he said China’s rapid expansion of green finance demonstrates the effect of a coordinated, system-wide approach. The central bank’s refinancing facilities, strengthened disclosure requirements, and centralized monitoring significantly widened green credit. Environmental objectives were integrated into broader economic planning, which shifted green finance from a niche segment to a mainstream credit channel.

“For Pakistan, the key lesson is policy coherence,” he said, adding that banking regulation, capital markets, fiscal incentives, and development finance must work together to create commercially viable climate investments.

On MRV systems, Dr. Bakht said capacity in Pakistan “is improving but remains uneven by international standards.” He warned that without credible measurement, green finance risks being perceived as symbolic rather than substantive.

Drawing again from China’s model, he said strengthening Pakistan’s system would require centralized monitoring of green loans, stronger disclosure requirements, accredited third-party verifiers, standardized metrics aligned with global frameworks, centralized data platforms, and consistent regulatory oversight.

Muhammad Anees Khan, Electrical Engineer at Islamabad Electric Supply Company, also pointed to implementation gaps. “The main hurdle is not a lack of intent, but a gap between policy ambition and institutional execution,” he said.

He noted that China’s experience shows that clear rules combined with disciplined implementation can translate policy into large-scale green lending. He supported the adoption of a stricter and standardized green taxonomy in Pakistan and suggested concessional refinancing windows for renewable energy, electric mobility, climate-smart agriculture, and energy efficiency.

Experts agree that while Pakistan has made measurable progress in green financing, the country can accelerate and stabilize growth by adapting experience from China’s coordinated green loan framework. Clear definitions, regulatory alignment, centralized monitoring, disclosure standards, and performance-linked incentives, they say, can help transform green lending from a limited initiative into a reliable and mainstream financing channel.

Credit: INP-WealthPk