Dawn of a new era: The story behind Bangladesh’s first green bond
Bangladesh’s maiden sustainability-linked bond issuance is a rallying call for corporates and investors in the debt and capital equity markets, especially with regards to sustainability-linked products. The green bond was issued amid challenging market conditions and structured to incentivise both issuers and investors. As such, it demonstrates the potential value of such activity in unlocking much needed capital in the market.
Like many countries around the world, the impacts of climate change are among the most serious challenges to Bangladesh’s future development. As a country that is acutely exposed to increasingly frequent extreme weather in the form of cyclones, severe flooding, rising sea levels and more, the economic impact of climate change on Bangladesh’s economy and society is significant.
To help mitigate climate change, Bangladesh has committed to reducing greenhouse gas (GHG) emissions by 5 per cent unconditionally by 2030 from 2011 levels, based on a business-as-usual scenarios; and conditionally with support from the international community by 10 per cent by the same date.
However, as with almost all climate targets at the national level, government action is only part of the solution. Private sector participation from the likes of PRAN Agro Limited (PAL), one of the country’s largest conglomerates focusing on agricultural processing and distribution, is also essential.“
“Anything that can be done in terms of sustainability, must be done,” asserts PRAN-RFL Group, PAL’s parent company.
Deep commitment to sustainability
Such ambition shouldn’t surprise anyone familiar with Bangladesh. The South Asian country – the world’s eighth most populous at over 171 million – has for many years been a regional leader across numerous industries including textiles and agriculture, both of which are at the forefront of today’s climate challenge in terms of access to water and locally produced agri-commodities. Accordingly, Bangladesh has made bold commitments in realising the United Nations’ Sustainable Development Goals (UN SDGs), to mitigate the effects of climate change on the nation, as well as tackle wider sustainability issues like solid waste and creating a more equitable society.
Likewise, since its establishment in 1999, environmental and social sustainability has been a critical element in PAL’s journey. As a company that processes and distributes a wide range of food products – including ketchup, fruit pulps, spices, mustard oil, jams, jellies, nuts, pulses and more – the company is acutely aware of the difference it can make in terms of water usage, energy consumption and food waste; as well as ensuring its employees and stakeholders prosper from its operations.
Over 100,000 contractual farmers are currently working for PRAN-RFL Group, which directly employs over 140,000 people. In total, over 1.5 million people across the globe are reliant on the company for employment.
In early 2023, PAL decided to take its sustainability efforts to the next level through the deployment of technological solutions, combined with employee and partner upskilling and knowledge transfer. The plan included upgrading to advanced technology to process greater volumes of its food waste into compost; implementing more energy-efficient procedures, so that its manufacturing operations emit less GHGs; and increasing the efficiency of its effluent water treatment plant, which treats the company’s wastewater, enabling water-reuse. The company additionally intends to upskill its contract farmers on the latest sustainable farming best practices, while encouraging them to use organic compost and solar irrigation through raw material sourcing, best practice sharing, and technical support.
Achieving such goals will significantly enhance the sustainability credentials of the company. Yet, to realise them, the company would likely incur high costs.
Capital conundrum
To support their climate goals, PAL chose to raise capital via the bond market, to take advantage of Bangladesh’s maturing capital market and growing investor pool. But there were several obstacles to overcome as a corporate entity seeking to raise debt. Currently, Bangladesh’s bond market is dominated by government bonds, with corporate debt relatively underdeveloped. The private bond market is largely limited to commercial banks issuing subordinated debt to meet capital adequacy requirements.
Furthermore, zero-coupon bonds have been prevalent, which deters potential investors from participating in the corporate bond space. Convincing issuers that issuing debt is a viable alternative to conventional financing therefore remains challenging, with more favourable terms found in the bank lending space. With respect to green bonds, current barriers include the attractiveness of these relative to other financial products; the availability and quality of the underlying asset; and the capacity of banks and other service providers to deliver a successful issuance.
With the odds stacked against PAL, how did the company overcome these hurdles, and raise the necessary capital to fund its sustainability initiatives?
Help is at hand
To help address these issues and raise the necessary capital to fund its sustainability initiatives, PAL approached Standard Chartered Bangladesh. Since 1997, the bank has provided PRAN-RFL Group and its many subsidiaries with long-term funding solutions, both in local currency and foreign currencies, through bonds, loans, trade financing, cash management, and employee banking facilities.
More recently, Standard Chartered Bangladesh executed several pioneering transactions with the group, including its first Chinese ECA-backed transaction; and first commercial paper for a local company in Bangladesh. It was therefore fitting that the bank was chosen to issue the country’s first green bond with a face value of BDT1.5 billion (over USD13.60 million) to finance PAL’s green and energy-efficient initiatives, including agro-recycling, organic farming support for contract farmers, alongside environmental improvements in its manufacturing operations.
PAL issued the bond at a 9.00 per cent fixed coupon rate. This helped lock in the interest cost, at a time when the financial markets and interest rates were volatile, and market liquidity was tightening. Due to strong credibility and reputation of the group, and Standard Chartered Bangladesh’s capabilities, the deal was fully subscribed, even amid difficult market conditions.
A ground-breaking deal structure
Of particular note is the bond’s ground-breaking structure: the issuance incentivises both the issuer and investors – a move that encouraged PAL to seek a debt-raising alternative beyond traditional bank financing, while addressing the attractiveness of the green bond segment.
The green bond’s metrics seek to support the UN SDGs, linking funding costs to PAL’s impact on poverty alleviation, zero hunger, good health, economic growth, responsible consumption, climate action, and life on land. The bond has since positively influenced various environmental aspects, such as resource efficiency, waste management, and renewable energy adoption.
Its impact notably extends to financial inclusion, as PAL engages with over 100,000 contractual farmers, supporting their livelihoods and creating employment. The issuance could pave the way for future developments in Bangladesh’s corporate bond market by encouraging other companies to embrace green projects, while fostering the growth of Bangladesh’s national green bond framework, and strengthening the domestic ratings market.
The deal is also a ground-breaking departure from the norm of zero-coupon bonds. It pioneers a new structure in Bangladesh by presenting the first coupon-bearing bond for a local corporate, which is intricately linked with sustainability initiatives. This novel approach not only diversifies the country’s bond market landscape; it also marks a significant departure from the conventional bond structures in Bangladesh.
A virtuous cycle begins
There are many reasons why Standard Chartered Bangladesh remains the preferred banking partner for PAL, and PRAN-RFL Group overall. “Standard Chartered Bangladesh is the largest, private multinational bank in the country, with the highest capital base, making it uniquely positioned to cater to the complex financing requirements of conglomerates like PRAN-RFL Group,” enthuses Uzma Chowdhury, Director of Finance, Pran RFL Group.
By leveraging Standard Chartered’s strong network and global presence, the bank can raise liquidity more cheaply, introduce us to new international markets, and support our subsidiaries and export footprint in 145 markets.
Uzma Chowdhury, Director of Finance, Pran RFL Group
Perhaps of most significance is the shared commitment to sustainability by both entities, and the belief that through transactions like PAL’s green bond issuance and other sustainable finance mechanisms, Bangladesh can make meaningful progress on its environmental and societal goals. The coupling of financial instruments with sustainability objectives demonstrates a forward-thinking and innovative approach, setting a new precedent for corporate financing in the country.
By issuing Bangladesh’s first green bond, other large companies will follow suit and build a pipeline of commercial green projects, which will enhance the development of the domestic ratings market, and help in the consolidation of a national green bond framework.
Muhit Rahman, Managing Director and Head of Financial Markets, Standard Chartered Bangladesh
“Establishing a list of priority strategic green projects can help kick-start a virtuous cycle between investors and project developers. This will send strong signals to the market, reassuring issuers and investors, having a catalytic effect on future issuances,” explains Muhit Rahman, Managing Director and Head of Financial Markets of Standard Chartered Bangladesh.