Policy Analysis

For a Green Future, Africa Looks to Climate Bonds

By Evans Osano, on July 17, 2019

While lawmakers in the UK just recently declared “an environment and climate emergency”, the world’s most vulnerable are already facing its devastating effects.

Africa, being a poor and resource intensive continent is expected to suffer the greatest consequences, including risks to health, livelihood, food security, water supply, human security and economic growth. It is estimated that there will be 150 million environmental refugees by 2050.

Sustainable climate finance is working to combat climate change in developing regions around the world. Crucially, Green-, Social- and Sustainability Bonds serve as an attractive option for investors. These bonds are similar to conventional bonds but the proceeds go towards projects with positive environmental or social outcomes. Sustainability bonds combine environmental and social outcomes.

Eligible projects range from energy, transport and waste management, to building construction, water and land use. But to effectively tap into this market, the public sector must be trained on green bonds and sustainable climate finance as a priority, to set the framework for private investors to follow.

The ecosystem of development

According to the OECD, we need annual investments of USD 6.9 trillion to meet Paris climate objectives by 2030. This will require the mobilization of both private and public funds as well as government policies that encourage climate-friendly investments. As part of the Kenya and Nigeria Green Bonds programs, FSD Africa—a UK-Aid funded development agency working to transform Africa’s financial markets—has been providing capacity building for the public sector, developing an ecosystem of green bonds in their respective markets.

The ecosystem requires the development of issuance guidelines, hand-holding support to potential issuers (including the sovereigns), training of the investment community on the new asset class, and establishing a local community of approved verifiers. But it is the training programs that are key to developing a successful, sustainable climate finance market. FSD Africa has supported training initiatives in both Kenya and Nigeria. In Nigeria, FSD Africa is working with our partners in the Climate Bonds Initiative and FMDQ OTC Securities Exchange, providing training to the Securities Exchange Commission (SEC) and the National Pensions Commission (PenCom), the regulatory agencies responsible for the capital markets and pensions sectors, respectively. Two local companies, NS Power and Access Bank, have followed the sovereign and issued green bonds in the market. These bonds have been oversubscribed domestically, reflecting a strong appetite.

Untapped potential

In Kenya, FSD Africa has trained the National Treasury, the Capital Markets Authority, the Retirement Benefits Authority, as well as trustees and fund managers. The goal of the training was to enhance the ability of policymakers and regulators to spur investments in climate resilient projects, which will eventually lead to sustainable economic growth and employment creation.

The training also helped to raise awareness for the development of appropriate policies and financial products to reduce the cost and impact of climate change in the region. This is providing impetus to the Kenyan government’s strong high-level policy commitments to inclusive, climate resilient economic growth and investment, including in its Constitution, Vision 2030, The Kenya National Green Climate Fund (GCF) Strategy and the Second Medium Term Plan (MTP2).

Climate finance is becoming increasingly important for emerging markets such as Sub-Saharan Africa. Sustainable, green finance will be particularly critical as the continent is expected to pursue infrastructure development on a larger scale in coming years, and it is possible to build in an environmentally responsible way.

There are also opportunities for financing smart agriculture, renewable energy, transport systems, water infrastructure and energy-efficient buildings across the continent. But to seize these opportunities, both the public and private sectors need to be trained in the importance and benefits of green bonds for the success of the continent in combating climate change.

Without governments and regulatory agencies able to develop frameworks and guidelines for issuance, this potential will go untapped. Africa is already suffering the devastating consequences of climate change and sustainable, green finance can serve as part of the solution.