By Liaquat Abbasi

Climate change is no longer merely an environmental issue. Unusually heavy rainfall, devastating floods, prolonged droughts, melting glaciers, water scarcity and increasingly severe heatwaves are disrupting economies, societies and financial systems across the world.

For developing countries, the crisis is particularly acute. Their capacity to prevent disasters, recover from losses and adapt to a changing climate is often constrained by limited financial and institutional resources.

Pakistan presents a striking example of this imbalance. Although the country’s contribution to global greenhouse gas emissions is less than one per cent, it remains among the nations most vulnerable to the consequences of climate change.

The effects of floods, droughts, heatwaves and water shortages are no longer confined to crops and the natural environment. When a factory, shop or farm is damaged by a climate-related disaster, production and income suffer. So does the ability of businesses and individuals to repay their loans.

Climate change, therefore, is increasingly becoming not only an environmental crisis but also a financial one.

Against this backdrop, Pakistan’s banking sector is beginning to reassess traditional approaches to lending and risk. The State Bank of Pakistan (SBP), which has identified climate change as one of the key cross-cutting themes of its Vision 2028, has increasingly brought green financing, environmental and social risk management, and climate-related financial risks into the mainstream of banking policy.

But a fundamental question remains: Are the benefits of these policies—and the billions of rupees committed to green financing—reaching those who are most severely affected by climate change?

For small farmers in Sindh, who are already facing water shortages, erratic weather, rising input costs and limited access to credit, another question is equally important: How wide is the gap between green-financing policy and practical access to finance?

A Global Crisis, Local Consequences

Climate change is primarily driven by the growing concentration of greenhouse gases resulting from human activity. These gases trap heat in the Earth’s atmosphere, contributing to rising temperatures and changes in the climate.

The principal greenhouse gases include carbon dioxide, methane, nitrous oxide, fluorinated gases and water vapour.

The burning of fossil fuels such as coal, oil and natural gas releases large quantities of carbon dioxide. Deforestation reduces the planet’s natural capacity to absorb carbon. Industries, power plants and transport systems also contribute significantly to emissions.

Agriculture and livestock are important sources of methane, chemical fertilisers release nitrous oxide, while landfill sites also generate greenhouse gases.

Historically, the world’s major industrial economies have been responsible for a substantial share of global emissions. Today, China, the United States and India are among the largest annual emitters, along with a number of European economies.

Pakistan’s share remains relatively small. Yet its geographical exposure and economic vulnerability make it highly susceptible to climate shocks.

The country’s heavy dependence on agriculture is a major factor. Farming depends on weather, water and natural conditions, making it particularly vulnerable to climate disruption. Crop failures reduce farmers’ incomes and weaken their capacity to repay debt.

For banks, this means climate change is increasingly becoming a credit and financial-stability risk.

What Does Climate Risk Mean for Banks?

Traditional banking assessments focus on a borrower’s income, business record, collateral and ability to repay.

Climate change is adding a new dimension to that calculation.

A factory located in a flood-prone area, for example, may have to suspend production after severe rainfall or flooding. A drought-stricken region may experience crop failures that inflict heavy losses on farmers and agricultural businesses.

In both cases, borrowers’ incomes decline and their capacity to service debt may be weakened.

The risk is not limited to physical disasters.

The transition towards a lower-carbon economy may also create what financial experts describe as transition risks. Stricter environmental regulations, carbon taxes and new energy standards could raise costs for certain industries. Businesses that fail to adapt may face declining profitability and financial instability.

For banks, therefore, the question is no longer simply whether a borrower is financially strong today. It is also whether that borrower can withstand the climate and economic shocks of the future.

From Guidelines to a Regulatory Framework

Pakistan’s efforts to integrate green banking and environmental risk into its financial system have become more structured over the past decade.

Early Green Banking Guidelines encouraged banks to incorporate environmental risks into their lending policies, increase financing for environmentally sustainable projects and reduce the environmental impact of their own operations.

A significant development came in November 2022 with the issuance of the Environmental and Social Risk Management (ESRM) Implementation Manual.

The manual provided banks and other financial institutions with detailed tools and checklists for identifying, assessing and managing environmental and social risks. The objective was to ensure that lending and investment decisions considered not only financial indicators but also the environmental and social consequences of projects.

Another important step came with the introduction of the Pakistan Green Taxonomy in 2025.

Its purpose is to classify economic activities and projects according to defined environmental criteria. Instead of allowing projects to be described as “green” simply as a label, the taxonomy seeks to assess their actual environmental benefits against established standards.

During the same period, the SBP also introduced a regulatory framework for managing Climate-related Financial Risks, as well as Climate Stress Testing Guidelines.

The result is a gradual shift in the role of green banking. It is moving beyond corporate social responsibility and promotional language towards becoming part of banks’ core risk-management framework.

A Changing Approach to Lending

According to information made available by the State Bank, the introduction of ESRM and climate stress testing has broadened the scope of loan assessments.

When evaluating medium-sized and large commercial loans, banks are expected to consider environmental and social risks alongside conventional financial indicators.

Through prohibited-activity lists, standardised checklists and sector-specific assessments, projects can be classified according to different levels of risk. Higher-risk projects may require additional information, more detailed scrutiny and measures designed to reduce potential risks.

Climate stress testing goes a step further.

It requires banks to assess possible future scenarios. They may examine how severe floods, heatwaves or droughts could affect a borrower’s income, assets and ability to repay debt. Risks associated with the transition to a lower-carbon economy are also taken into account.

As a result, a bank may alter the amount of financing, collateral requirements or lending terms. It may also require borrowers to implement an environmental and social action plan.

The climate crisis is thus becoming directly linked to credit risk and financial stability.

From Green-Financing Policy to Real Investment

Green financing refers to financial support and investment directed towards activities that protect the environment, reduce pollution, improve energy efficiency and help mitigate or adapt to climate change.

This may include renewable energy, solar power, energy-efficient technologies, clean transport, water conservation, waste management, afforestation and other environmentally sustainable activities.

Pakistan is confronting an energy crisis, growing water stress, environmental degradation and rising climate risks at the same time. Redirecting capital towards renewable energy and other sustainable sectors has therefore become increasingly important.

According to figures provided by the State Bank of Pakistan, more than Rs94.7 billion has been provided through available financing and refinancing facilities for renewable energy.

The support has reportedly benefited more than 4,500 renewable-energy projects and contributed to the development of around 2,061 megawatts of clean-energy generation capacity.

These figures suggest that green financing is no longer confined to policy documents.

However, the scale of the effort remains limited when compared with Pakistan’s overall needs.

According to SBP estimates, Pakistan will require approximately $331 billion in climate financing by 2030 to meet adaptation requirements and achieve targets related to reducing greenhouse gas emissions.

The figure highlights a substantial gap between the country’s needs and the resources currently available.

Policy Exists, But How Far Has Implementation Progressed?

Pakistan’s financial sector includes more than three dozen commercial banks and nearly a dozen microfinance banks serving different sectors and sections of society.

Within such a large financial structure, a critical question arises: To what extent are these institutions implementing the SBP’s policies on green financing, environmental and social risks, and climate-related financial risks in practice?

The State Bank appears to monitor progress through reporting requirements, supervision, audits and phased implementation.

The establishment of green-banking offices in scheduled banks, board-level approval of relevant policies and the integration of ESRM into loan-approval procedures are among the steps that have emerged.

Yet policy formulation and implementation are not the same thing.

Developing a framework is one stage; ensuring that it shapes decisions at every bank, branch and lending desk is another.

According to the SBP, all financial institutions are required to submit board-approved implementation plans for climate-related regulations by September 30, 2026, while full regulatory compliance is targeted by June 30, 2029.

This suggests that Pakistan’s banking sector remains in a transition phase, where policy is still being translated into data systems, technical expertise, staff training and day-to-day banking decisions.

The Banking Sector’s Response—and the Questions That Remain

To make this research more balanced, several commercial and microfinance banks were approached for their views.

They were asked about green financing, climate-risk management, implementation of State Bank policies, access to finance for the agricultural sector and small farmers, green loans and the practical challenges involved.

The policy and regulatory direction of Pakistan’s banking sector in this report is based on available official documents, SBP frameworks and existing data. To understand conditions on the ground, the experiences and views of farmers and agricultural representatives from Sindh have also been included.

However, detailed responses from the banks approached were not available.

As a result, it is not possible to draw a definitive conclusion about the level of practical implementation by individual institutions.

The Sindh Question: Where Does the Small Farmer Stand?

The real test of green financing is accessibility—particularly for those who are directly exposed to the consequences of climate change.

Agriculture in Sindh is already under pressure from water shortages, unpredictable rainfall, rising temperatures and increasing production costs.

Small farmers generally operate with limited capital. When crops fail or suffer damage, their income declines and their ability to repay loans is affected.

Qabool Khatian, a farmer from Badin, former president of the Chamber of Agriculture and current chairman of the Sindh Irrigation and Drainage Authority, says there is a visible difference between claims made about green financing and realities on the ground.

According to him, the conditions set by commercial banks for agricultural loans are often difficult for ordinary farmers to meet.

Large farmers may be better positioned to obtain green financing, but access for the average Sindhi farmer remains limited.

Khatian argues that unless commercial banks play a more facilitative role for ordinary farmers, it will be difficult to expand environmentally sustainable agricultural practices on a large scale.

He also stresses the urgent need for work on afforestation, forest restoration and the protection of natural resources.

Awareness and Documentary Barriers

Syed Nadeem Shah, Vice-President of the Sindh Abadgar Board and a farmer associated with Matiari, points to another major challenge: lack of awareness.

According to him, many farmers have little or no basic knowledge of green financing or green loans.

He believes farmers need to be informed about such schemes through print and electronic media and other channels.

In his view, one of the biggest obstacles for small farmers involves issues related to passbooks and land-revenue records.

A farmer who lacks the required documents may effectively be excluded from the credit system before even reaching the bank.

Announcing a loan scheme, therefore, is not enough. Administrative and documentary barriers must also be addressed.

Shah says that financing arrangements for agricultural requirements such as solar systems and drip irrigation already exist at several banks. However, access remains difficult for many small farmers.

To promote green farming, he argues, loans should be linked to projects that offer both environmental benefits and clear economic advantages for farmers.

Traditional Banking Practices Need to Change

Raja Haider Ali Thebo, a farmer from the Manjhand area and Social Media Coordinator of the Sindh Abadgar Ittehad, says water shortages, climate change and rising agricultural costs have made farming increasingly difficult for small cultivators.

He believes green financing could play an important role in supporting solar systems, drip irrigation, water-saving technologies and other environmentally sustainable farming practices.

But, he says, the real issue is practical access.

Complicated paperwork, problems with revenue records and difficulties encountered by farmers at various stages of the process can become major barriers.

Without suitable loans and financial support, how can a small farmer invest in a solar system, drip irrigation or other water-saving technology?

Thebo believes banks need to develop more appropriate and flexible financial models for small farmers.

Access could be improved through direct engagement at district and taluka levels, awareness seminars, mobile-financing programmes and simplified loan facilities.

The Real Test: Access, Equity and Trust

Available policies and experiences from the ground suggest that Pakistan’s green-financing framework is moving forward.

But greater transparency is needed about its actual reach and its impact on different sections of society.

On one hand, the banking system must become more cautious in the face of climate-related financial risks.

On the other, if growing risk makes credit even more difficult for small and financially vulnerable borrowers to obtain, an important question of climate justice emerges.

The small farmer is both a victim of climate change and someone who needs investment to adapt to it.

Water-saving technology, solar energy and more climate-resilient agriculture require capital. Yet limited collateral, documentary obstacles and financial weakness may make it difficult for small farmers to obtain credit.

Bridging this gap will require coordinated action by financial policymakers, the State Bank, commercial banks and provincial institutions.

Problems involving passbooks and land records need to be addressed. Loan applications should be simplified. Awareness campaigns and technical training need to be expanded. Lending models must also become flexible enough to reflect climate-related risks.

Loan-repayment systems, too, should take agricultural realities into account.

If floods or droughts destroy crops, conventional instalment schedules can place farmers under even greater financial pressure.

Flexible arrangements for such circumstances could become an important part of a wider climate-adaptation strategy.

Accountability and Transparency

As green and climate-related frameworks become more structured and mandatory, the accountability of banks is also likely to increase.

Misleading or inaccurate data, serious weaknesses in risk management and failure to comply with regulatory requirements could affect both institutional oversight and management assessments.

But accountability also requires transparency.

To understand the real impact of green financing, it is not enough to look only at aggregate figures.

It is also necessary to ask: Which sectors and regions are receiving the financing? What types of borrowers are benefiting? And what obstacles continue to prevent small borrowers from accessing it?

Green policy, therefore, is not simply a matter of environmental reputation.

It is directly connected to a bank’s risk management, business strategy, regulatory obligations and public trust.

Conclusion: The Real Challenge Is Turning Policy into Practice

Pakistan’s evolving approach to climate change within the banking sector marks an important shift.

From the Green Banking Guidelines to ESRM, the Pakistan Green Taxonomy, Climate Stress Testing and the regulatory framework for climate-related financial risks, the country’s financial system is gradually recognising climate change as a genuine financial threat.

Billions of rupees in renewable-energy financing and support for thousands of projects represent positive progress.

Yet Pakistan’s estimated need for around $331 billion in climate financing by 2030 also exposes the enormous gap between current efforts and the scale of the challenge.

The central question remains:

Is green financing reaching the people who need it most?

Efforts were made during the preparation of this research to obtain direct responses from several commercial and microfinance banks. However, detailed replies were not available, making it impossible to reach a definitive conclusion about the practical implementation of these policies by individual institutions.

Even so, the available policies, regulatory frameworks and the experiences of farmers in Sindh indicate that Pakistan remains in a transition phase—from policy formulation towards comprehensive implementation.

The real test will be on the ground.

Can a small farmer easily obtain a loan for a solar pump?

Can he secure appropriate financial support for drip irrigation?

Will obstacles related to passbooks and land-revenue records be removed?

Is he even aware of the green-financing facilities available to him?

And after a flood or drought, will the credit system support him—or push him deeper into financial distress?

The answers to these questions will ultimately determine the true success of green financing.

Its purpose should not be limited to increasing the number of solar projects.

Green financing must help strengthen the ability of agriculture, water systems, industry, infrastructure and urban economies to withstand climate-related shocks.

That requires a broader strategy—one that combines financial policy with afforestation, forest restoration, mangrove protection, water conservation, agricultural research and technical training.

The government, the State Bank, commercial banks, microfinance institutions, the revenue department, agricultural extension services, agricultural universities and farmers’ organisations must work together to build a system in which the benefits of green policy do not remain confined to official files and aggregate statistics.

They must also reach the small farmer standing before an uncertain climate, trying to protect both his crop and his future.

Ultimately, Pakistan’s greatest challenge is not merely to formulate policy, but to turn policy into effective action.

The real success of green financing will come when a strong bridge is built between environmental protection, financial stability and the economic needs of ordinary people—a bridge that gives even those most severely affected by the climate crisis a genuine opportunity to invest in their future.!

The writer can be contacted at abbasiliaquat9@gmail.com.