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Research

What are Green Bonds? What to Know about this Environmental Benefiting Investment Instrument.

Green bonds, climate bonds, or sustainable bonds, call it whatever name you choose, are gaining popularity and acceptance as fixed-income instruments and tradeable assets.

The International Capital Market Association, ICMA, differentiated a “green bond” from a common bond by its label, to signify the use of funds and investment to finance or re-finance business activities projects with environmental benefits.

This is in line with the World Bank’s “Strategic Framework for Development and Climate Change” which aims to stimulate and coordinate public and private sector activity to combat climate change. Global organizations like the IFC, World Bank, and AfDB are heavily vested in enhancing climate awareness, hence, opportunities for green financing.

Given that green projects and activities are being impeded by access to the cheap cost of funds, financial markets can help solve the climate change challenge by coming up with financial tools like green bonds to drive capital to green projects that address energy efficiency, and renewable energy, green buildings among others. Beyond green bonds helping to drive capital towards green financing, it also facilitates sustainability-themed investments from institutional investors.

Since the awareness of green financing, the World Bank has raised more than US$13 billion through almost 150 green bonds in 20 currencies for institutional and retail investors. This shows how a green bond is a commercially viable tool for green financing. As of June 30, 2021, IFC green bond proceeds have supported 236 eligible projects since FY2014. The total committed amount for these projects is $9.4 billion, of which $7.7 billion has been disbursed.

Source: International Finance Corporation (IFC), green bond impact result 2021

Green Bond Issuances in Africa, vis-à-vis Issuances across the World

The below chart shows the composition of the total green bonds issued by region from 2007 to 2018, where Africa constitutes a mere 0.4 percent of the market share by value. Notably, within Africa, the distribution of the funds raised by green bond issuance has been overwhelmingly concentrated in South Africa (73.8%), Morocco (16.9%), and Nigeria (6.5%), among a few others.

chart shows the composition of the total green bonds issued by region from 2007 to 2018,

Opportunities for Green Bond Issuances in Africa

It has been argued that developing regions are more likely to be the worst impacted by climate change (Filho et al., 2018). Africa has been identified as one of the most vulnerable as it is already climatically stressed, and climate change is expected to exacerbate this (Dionne & Horowitz 2016).

On the back of the above, Sub-Saharan Africa urgently needs to mobilize $50 billion annually to address climate adaptation in agriculture, power, and urban infrastructure. Investment in Green bond markets (climate finance) will offer part of the solution by mobilizing private investment as expected public finance from national governments, and international donors are unlikely to meet these needs.

According to UNECA and the IMF, the current lack of finance is the critical barrier to green projects in Sub-Saharan Africa as investor demand is concentrated in governments and a few limited private sectors such as telecoms and financial services. More finance needs to be directed to diversify and increase power sources, hence, the need for private finance through green bond issuances.

Bottlenecks to the issuance of green bonds in Africa

1.      High transaction costs associated with green bond issuance

2.      The lack of incentives as well as weak government policies and mandates

3.      Common terms and actionable rights

4.      Reporting standards, metrics, and transparency

Possible solution(s) identified bottlenecks: Strict adherence to the Green Bond Principles as postulated by the International Capital Market Association (ICMA). GBP are voluntary guidelines and processes for the issuance of green bonds to promote transparency and integrity in the green bond market.

Key Component of GBP Includes:

  • Issuers are encouraged to make information readily available on the use of proceeds
  • Use of green bond proceeds for the exact project as stated in its prospectus
  • A robust process for project evaluation and selection.
  • Management of proceeds in which issuers are expected to track the net proceeds of the green bond for the entire period.
  1. Incorporating the green use of proceeds and/or reporting provisions directly into the terms and conditions of the bonds
  2. Introducing margin incentives as a penalty for non-compliance.

In summary, green bond issuances are pivotal for financing green projects, most especially in Africa as it will save the continent, currently climatically stressed. To improve the level of green bond issuances in Africa, addressing the aforementioned challenges by complying with the GBP is imperative.