A Demand Side Perspective
I’m using this blog post to explore the role of Finance and Investment in facilitating the transition to a low carbon economy; from the demand side, in the context of Bangladesh’s garment sector.
If the finance sector is to be an agent for change in the transition to a low-carbon economy, the demand for such finance will be as important as its supply. In my (limited and small-scale) experience, the need for ‘changing finance to embrace longer term and more systemic thinking’ will need as much attention on the demand side as the supply side.
Micro-Level Sustainability Transition
I was recently involved in a pilot project in Bangladesh, in partnership with an impact investment consultancy firm, that developed a support package for garment factories. The package included concessional loans and technical assistance to procure and install energy saving technologies in factories. Investments included installation of meters to track energy use, conversion to LED lighting, condensation recovery systems and enhancing the energy efficiency of sewing machines.
The pilot actually financed these investments through grants not loans in 3 pilot factories. The intention being to use the pilot to build a financial model that proved the ‘business case’ for making such investments. Once proved, the plan was to scale the pilot industry-wide with support from international impact investors and local banks.
And the case was proven. The results were celebrated and clear. Factories could, in theory, borrow to invest in energy-saving (climate friendly) technologies, which generated sufficient cost reductions to both pay back the loans at market interest rates, and generate a return on top of that – within a short 1-2 year time horizon.
While the pilot factories seemed happy with their investments and the business case seemed water tight, it just wasn’t clear that factories would actually take out loans – even at concessional rates – to make such investments. Even with grant financing 2 of the 3 factories in the pilot weren’t over-keen on engaging in the project.
Why was this? Why weren’t we left convinced that business owners would make economically rational decisions on presentation of robust evidence? Three immediate possibilities came to mind:
1) Lack of long-term vision for their businesses which limits appetite for investment, even over a short time period.
2) Lack of capacity and expertise to maintain new equipment, and therefore generate a guaranteed return on investment; and
3) The role of government policy and regulation (or lack of) in generating the demand (or lack of) for such finance.
The literature provided further insight in recognising that the ‘socio-technical transition to an environmentally sustainable economy’ may encounter barriers of economic, social, political or behavioural–psychological nature. Three possibilities for limited demand suggested by the literature (at the macro level) resonated with my observations (at the micro level):
1) Supply chain pressure.What would change if the outcomes of such investments were a condition of a brand’s commercial relationships with a factory?
2) Low awareness of problems or solutions due to the absence of factory environmental management systems. Whilst the installation of meters partly addressed this issue, I’m not sure that they generated sufficient ‘ownership’ among factory management; and
3) Transitions are not smooth and involve winners and losers. Did we sufficiently understand the dynamics within each factory management team, especially as procurement of new equipment was taken out of the hands of the factory? Stakeholder analysis might have helped us here.
Towards a Better Understanding
In summary, my key learning is that the design of this project should have paid more attention to ‘the social–institutional dimensions of innovations and transitions.’ At a minimum, the (clearly non-behavioural) economists designing the project might have explored the implications of bounded rationality on the project’s viability. There are also world-class garment factories in Bangladesh, sitting alongside those reluctant or unable to change. What separates the two? What can we learn from the former?
Any other insights? What other factors may be blocking the demand side? And what can be done to address it?
 CISL notes for this module.
 van den Bergh, J. C. J. M., Truffer, B., & Kallis, G. (2011). Environmental innovation and societal transitions: Introduction and overview. Environmental Innovation and Societal Transitions, 1(1), 1–23
 ‘The idea that in decision-making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision.’ https://en.wikiquote.org/wiki/Bounded_rationality.
(Picture is my own – taken in Dhaka, Bangladesh)