Ideas & Debate

Green bonds great financing solution for infrastructure

Road construction in Othaya, Nyeri County. Improving Kenyan infrastructure to make it resilient to  extreme weather could cost an additional Sh50 billion per year.  PHOTO | JOSEPH KANYI
Road construction in Othaya, Nyeri County. Improving Kenyan infrastructure to make it resilient to extreme weather could cost an additional Sh50 billion per year. PHOTO | JOSEPH KANYI 

Sustainable development and greening the economy is taking centre stage in Kenya. This transition will involve financing, a challenge which requires to be tackled.

Various efforts are being dedicated to this course, including the government’s efforts to develop the Green Economy Strategy and Implementation Plan (Gesip), which provides a policy framework to facilitate a transition to a green economy.

Gesip also outlines the need to mainstream and align green economy initiatives across the economic, social and environmental spheres.

The private sector has also shown keen interest in green solutions. Kenya Bankers Association (KBA), in conjunction with the Central Bank of Kenya (CBK), has developed sustainable banking principles.

Nairobi Securities Exchange (NSE), on the other hand, has become a Sustainable Stock Exchanges Initiative member and is committed to promoting sustainability in the scope of its products as well as raising standards of reporting for listed entities.

The best case output of the above efforts is the emergence of the capital markets as sources of green project financing.

This will result in the emergence and development of sustainable responsible investments as an asset class for investors.

In the past traditional financing such as corporate bonds, public and private equity, venture capital and government funding have been the most accessible sources of capital for green technologies such as solar, geothermal and wind.

As these technologies become tested, proven, and refined, investors are progressing green bonds.

These are bonds whose proceeds are used for green projects, mostly on climate change mitigation and adaptation.

Green bonds are a major source of the $100 billion (Sh10 trillion) committed by the Paris Climate Change Agreement. So far, the World Bank has mobilised over $5.3 billion (Sh530 billion) through 61 green bond transactions in 17 currencies, while the International Finance Corporation (IFC) has issued $3.4 billion (Sh340 billion) in green bonds worldwide.

In Kenya, green bonds can be an addition class of assets for investors and a form of financing green infrastructure projects too. This is more so considering that climate change is posing a serious challenge to the achievement of Vision 2030 and sustainable development.

Studies show that improving infrastructure to make it resilient to extreme weather could cost an additional $500 million (Sh50 billion) per year, equivalent to about 2.3 per cent of the Kenya’s GDP.

If temperatures continues rising beyond the two degree Celsius trajectory, adaptation and mitigation costs will rise dramatically with the possibility of reaching seven per cent of GDP by 2030.

Despite the urgent need to build climate resilient infrastructure suitable for a low carbon economy, this massive investment need is not being met.

A possible source is assets held by Kenyan banks, pension funds, insurers, and wealthy individuals which was equivalent to over 115 per cent of GDP in 2015, up from 108 per cent of total assets (excluding capital markets) in 2014.

Some of this capital can be directed to green investment, mainly through green bonds, to bridge the existing gap.

For low carbon and climate resilient infrastructure, accessing cheap capital is particularly important as it requires more upfront capital than high carbon, non-resilient infrastructure. Such infrastructure also requires longer term capital to avoid refinancing risk.

Bonds are therefore an attractive financing tool because they are a cheap and long-term source of capital.

Green bonds will address investment needs of institutional investors, making them appropriate tools to tap into their large capital holdings.

High credit ratings

A bond’s label depends on the type of project funded, not the credentials of the issuer.

This means green bonds can be issued by a wide range of entities including large companies with high credit ratings, governments and small and medium enterprises.

The green label makes it easier for institutional investors with climate change commitments to identify with the investments.
The label is a tool which reduces friction in the investment process.

In June 2016, the outstanding issuance of green bonds stood at $43 billion (Sh4.3 trillion) compared to the unlabelled climate aligned bonds of $632 billion (Sh63.2 trillion) worldwide.

Over time, the bond can be a significant contributor to closing the investment gap for climate friendly infrastructure in both developed and emerging economies.

It is however critical that the green bond market scales up faster than the current trend.

Both the private and public sector have a role to play in ensuring faster scaling up.

This involves addressing key challenges such as lack of bankable and robust projects, lack of preparedness for green bond financing and common standards, risk averse investors with limited capacity to analyse green bonds, and relatively small investments that do not appeal to large institutional investors.

The bond market in Kenya is mature, especially from the corporate and government perspective, and hence provide a good starting point for green bonds.

There is need for corporates, national and county governments to consider issuing green bonds.

Mungai is the CEO, Kenya Climate Innovation Centre. Email: [email protected]