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Climate change is here: time to use the whole financial toolkit

Evans Osano
By Evans Osano

Director for Capital Markets at Financial Sector Deepening Africa (FSDA).

Posted on Thursday, 13 February 2020 10:27, updated on Monday, 19 October 2020 21:30

Cape Town was an early adopter of wind power REUTERS/Mike Hutchings

From bushfires in Australia and floods in Venice, to Cyclones Idai and Kenneth which wrought devastating havoc to Southern Africa last year, the effects of climate change have materialised.

While some global leaders may be slow to react, the business community is not, with regular announcements of commitments and new investments.

Most notably was the recent announcement from Blackrock – the world’s largest asset manager – who announced they will divest from thermal coal producers and invest US$100m in a half billion fund for green infrastructure in emerging markets.

Blackrock isn’t alone. JP Morgan and Citigroup both announced combined commitments of $255m for their own respective initiatives, which aim to target projects with financial and social returns.

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These commitments reflect similar trends we are seeing in the green bonds markets: global investors want more investments that combine returns with positive environmental outcomes.

In 2019, green bond issuances continued to soar, even overshooting initial projections.

Last year, $250bn worth of green bonds were issued, a significant increase from $171bn the year before, and $84bn in 2016.

And while developed markets still make up the bulk of bonds in terms of value and volume, the growth of emerging markets are gaining pace. Last year, emerging markets including UAE, India and Chile accounted for 21% of the total green bond issuances in 2019.

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In some ways the developing world has more to lose, with climate change expected to put increased pressure on food production, health and economic growth. Across Africa, we’ve seen positive steps from policy makers work to develop the structures that will give them access to the global green bond market. For example, Nigeria and Kenya have both developed frameworks to ensure local green bonds meet international certification standards and align with national priorities around food security, waste management and energy.

The two countries were therefore ahead of the European Union which agreed only in December on the EU taxonomy to provide investors with clarity on which activities are considered environmentally and socially sustainable.

Last month, Kenya issued the first local-currency green bond on the London Stock Exchange. While the bond’s value is only US$42 million, it represents a turning point for Kenya’s bond market. This is one of the first corporate bonds to be issued after Kenya’s bond market collapsed in 2016 following failure of two banks.

These are important developments and the role of the UK government, which funded the creation of the framework through FSD Africa, shouldn’t go unnoticed. But more work needs to be done to ensure that the opportunities being offered by Africa’s green bond markets, are not being missed.

For a start, we must encourage collaboration and investment in green financing and adaptation from Africa’s private sector. African businesses are not immune to the challenges of climate change and they cannot rely on governments only to supply project and infrastructural finance.

Green bonds will be a vital tool for the private sector to raise capital and become investors in the continent’s green finance markets. We also need to recognise the role of public-private partnerships and tax incentives to encourage the entry of private investors. Kenya leads the way again, by enhancing governance structures and regulation as well providing tax incentives to help encourage investments.

Next, the international community must continue training initiatives which ensure policy makers have the skills to drive the regulatory changes required. A good example of this is the work undertaken by the Climate Bonds Initiative and FSD Africa in Nigeria last year, where the two organizations delivered training to the Securities Exchange Commission and the National Pensions Commission. Elsewhere, in Kenya, training on the country’s National Treasury has been carried out to improve the capabilities of policy makers and regulators. We need to ensure policy makers have the skills needed to foster the continued growth of local green bond markets.

Lastly, governments across the continent must play a key role in developing and rolling out green bond regulations as well as encouraging market development. Frameworks are a good start, but governments also need to attract investors through sovereign bonds.

Nigeria has already started. In 2017 it became the first African country and the fourth in the world after Poland, France and Fiji, to issue a sovereign green bond. Kenya is expected to follow this year.

We are entering an important decade for the continent. There are ten years remaining to achieve the Sustainable Development Goals and global momentum around transitioning to a green economy is growing. Unlike the rest of the world, African governments will need to juggle delivery on both. Green finance will be critical, and we must maintain momentum and continue to grow Africa’s green bond market.

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