It is good news that the Nairobi Securities Exchange (NSE) has diversified into the Green Bond segment.
In
2007, the green bond market kicked off with a triple A investment grade
issuance from the European Investment Bank (EIB) and the World Bank.
The
wider bond market started to react after the first $1 billion green
bond sold within an hour of issue by the International Finance
Corporation (IFC), the private sector arm of the World Bank, in March
2013.
The growing risks brought on by climate change
are raising development costs for the world’s fast-growing cities and
developing countries.
Government funds alone will never
be enough to build resilience to extreme weather and deal with the
threats to energy, water, and food supplies – the private sector and
institutional investors must be involved.
The green
bond market faces challenges as a nascent market. Some of these
challenges are related to ensuring that the use of proceeds from green
bonds is strictly guided by sustainability principles to guard against
“green washing”.
This is also related to the old
debate on whether certain examples in subsectors like hydropower,
nuclear energy, waste incineration are eligible to be funded using green
bonds.
Though the green bond market is still very young, an
important aspect of exploring opportunities in green bonds is developing
an understanding of the type of investors and the nature of their
demand. It’s a young market, but with strong potential, and new
developments it will bring its value for investors into the spotlight.
A
new green bond issue by the French company EDF showed that the depth of
interest and ability to trigger climate finance is far wider than
today. The 1.4 billion euro issuance was two-times oversubscribed from
the start.
New green bond principles being developed
by leading investment and commercial banks are also expected to
encourage more investors, NSE expects to list first green bond before
the end of the year.
With respect to market
standardisation and guidelines, it is important to note that the nature
of green bonds is that they serve the dual purposes of an investment
instrument and also as a sustainable development instrument.
Consequently,
there is need for the development of best practices to ensure that the
dual purposes of that “green label” are met and safeguarded.
The
GBP (Green Bond principles) recognises potential eligible projects in
the areas of renewable energy, sustainable agriculture, climate change
adaptation, natural resource use, and biodiversity conservation which
are areas that hold significant potentials in Africa.
On
the other hand, other components of the GBP that relate to project
evaluation processes, transparency, reporting and the use of independent
verifiers also present opportunities for potential players in Africa to
build robust business management systems with stronger attention to
environmental and social sustainability safeguards.
Green
bonds create a new flow of finance for low-carbon development that’s
crucial. But they do more – they have the potential to move the finance
fulcrum in a cleaner direction, away from traditional fossil fuel
investments and into projects that will build our low-carbon future.
They
are delivering finance for clean energy, mass transit, and other
low-carbon projects that can help countries adapt to and mitigate
climate change, while giving investors high-quality-credit, fixed-income
investment opportunities that have a positive impact.
It
is a key step toward attracting more financing for renewable energy and
clean technology, especially for emerging markets where the green
growth financing gap is significant.
Africa must
embrace it as an innovative and alternative way of raising finance from
both domestic and external sources for sustainability-driven
investments. Let’s use appetite for green bonds to expand the universe
of investors who are investing in green assets.
Institutions
like the AFDB with experience in international development on the
continent and in green bonds have a critical role to play in supporting
these potential players in building the required capacity especially in
the development of in-house environmental and social management systems
that can be used in investment decision-making with close attention
given to shaping developments in market standardization such as the
Green Bond Principles
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