- Pubali Bank has signed a $50m climate loan with British International Investment primarily targeting the textile sector.
- Although Bangladesh contributed less than 0.4% of global greenhouse gas emissions last year, it has committed to cutting 22% of its carbon emissions by 2030.
- In mid-September Bangladesh Bank, the country’s central bank, published its policy on green bond financing for banks and financial institutions in line with international standards.
At the beginning of August 1971, former Beatles guitarist George Harrison organised the world’s first major music benefit concert for a humanitarian cause. Held in New York’s Madison Square Gardens, the Concert for Bangladesh had been organised to raise awareness of the humanitarian disaster in the South Asian country that had only recently become independent.
The concert raised $250,000 on the day and many millions since then, but both the climate problems facing the country and the capital needed remain.
“In the face of multiple severe risks from climate change, Bangladesh urgently needs to spur more private sector involvement,” said John Gandolfo, IFC’s acting regional vice-president for Asia and the Pacific, at the launch of the World Bank country climate and development report last week.
At the beginning of October (though only announced at the weekend), Dhaka-headquartered Pubali Bank, Bangladesh’s largest private commercial bank, signed a $50m climate loan with British International Investment (BII), the development finance institution of the UK government.
Symbolic in size, the aim of the loan facility is to increase climate-related lending and boost climate mitigation projects across Bangladesh and trigger further investment from other third parties.
A loan with assistance
“Bangladesh has made significant economic progress and is doing well as far as GDP growth goes, but the gains remain very vulnerable,” Thomas Girod, investment director of financial services debt at BII in London, tells Capital Monitor speaking of the threat of climate change.
The thinking behind the deal, he explains, is that Pubali Bank is one of the country’s largest and oldest commercial banks. It provides scale, he continues, and the ability to deliver change.
More to the point, the bank has a sizable portfolio of climate-related projects. According to the bank’s annual report, its green financing has grown from BDT789.6m ($7.8m) in 2018 to BDT1.8bn in 2020 and BDT2.5bn last year.
So far, Pubali Bank’s green financing deals have included loans for BDT2.7bn to install two effluent treatment plants, BDT100m for a solar plant and BDT40m for a project to manufacture bricks sustainably.
The financing will go to support green projects in all sectors, but Girod singles out the textile industry in particular and plans to increase energy efficiency within the sector.
With around four million workers, textiles is not only one of the country’s largest industries, it is also one of the drivers of the economy. The sector is the highest export earner and is responsible for 81% of GDP. But there is much scope for improvement. The country’s more than 5,600 factories use an estimated 27% of the country’s industrial energy use, according to a recent academic paper.
Although terms on the three-year loan have not been made public, he says that pricing came “at benchmark levels”.
Girod says that Pubali Bank is expected to report its loans on a quarterly basis “to ensure that those loans meet our eligibility criteria”, and they are then passed on to BII’s climate department. “We will also verify it on our side,” he says. Expectations are that Pubali Bank’s green loans will pass BII’s eligibility criteria. BII did not say what would happen if they did not.
What makes the loan especially attractive to the bank is that it comes with technical assistance. BII is working with Pubali Bank to see what parts of its climate finance practice “would benefit from third-party support”.
Girod says that he expects this to fall into several categories – making sure that the bank is equipped to identify loans that are eligible and meet international standards, as well as identifying client climate risk in its own portfolio.
There’s no inbuilt commitment for the loan to roll over in 2025. “We’ll see where they are a year or two down the road,” says Girot. The BII will then make a decision on whether further support would be beneficial or if it would be more impactful for the development finance institution to work with other banks in the sector or in other ways.
Bangladesh: Vulnerable to climate change
The timing of the loan is fortuitous.
The country is growing rapidly and has, faced with pandemic-related economic losses and the fallout from the Russian invasion of Ukraine, “managed the situation well”, according to Syed Naushad Zaman, Deutsche Bank’s chief country officer for Bangladesh. GDP growth is expected to hit 7.2% this year.
But Bangladesh remains on the front line of climate change.
The World Bank estimates that average annual losses from tropical cyclones currently wipe out 0.7% of its GDP and are only likely to increase.
The country’s sealine is particularly vulnerable to climate change. The World Bank believes that the threat of flooding could wipe 9% off the economy in the short term while rising sea levels by 2040 could shrink cropland in southern Bangladesh by 18%.
Although the country contributed less than 0.4% of global greenhouse gas emissions last year, at the COP26 summit in Glasgow in 2021 the country committed to cutting 22% of its carbon emissions by 2030.
In mid-September, Bangladesh Bank, the country’s central bank, published its policy on green bond financing for banks and financial institutions.
In line with the International Capital Market Association’s Green Bond Principles and the Climate Bonds Standard and Certification Scheme, the bank said that the “priority action sectors” were energy, transport and industry, but it was also looking at buildings, agriculture, waste, land use and forestry sectors.
The World Bank estimates that Bangladesh could raise up to $12.5bn in financing in the medium term for climate action via budget prioritisation, carbon taxation, external financing and private investment, but there is some way to go before this materialises. BII is under no illusions about the scope of its own loan.
Given that Pubali Bank currently has assets of $7.5bn, Girot acknowledges the loan won’t “revolutionise the market”. But it is an important line in the sand. The loan will help the bank, he hopes, position itself as a leader in the sector and that “the visibility of this project will raise the interest of other banks”.