Grow benefits of green finance by deepening capital markets
At the NSE: It is now a member of the Sustainable Stock Exchanges Initiative and is raising standards on sustainability reporting. PHOTO | FILE
Building on the World Investment Forum 2015 theme of Reforming International Investment Governance, our dialogue should no doubt have to deliberate on what we actually mean by “Green.”
Noting the massive gap in funding required to support climate change, infrastructure development, economic growth and renewable energy to name but a few, we are faced with the very real tensions over how narrowly or widely to set the definition of what is “green” and green finance.
As a case in point, in a year where China is very much leading from the front as an issuing jurisdiction for green bonds (accounting for 26 per cent of issuance year-to-date (YTD)), there remains division over their inclusion of clean coal and energy efficiency improvements in fossil fuels in their list of green project categories.
Furthermore, 2016 being the biggest year for Green Bond issuance on record, the challenge presented to members of the Sustainable Exchange Initiative (SSE) with regard to the promotion of sustainability reporting, the harmonisation of reporting format and the design of sustainability indices appears set to grow exponentially as against the size of the green finance products and issuances.
To place this in context, green bond issuances YTD are up 40 per cent as against 2015 with the market for green bonds projected to reach between $72 billion (Sh7.2 trillion) and $75 billion (Sh7.5 trillion) by year end.
The proceeds of this financing is being put towards renewable energy (47 per cent), buildings (10 per cent), transportation (10 per cent) and energy efficiency (8 per cent).
There is, therefore, little question of the alignment of green finance to the needs of emerging market economies that are engaged in significant investment in energy, commercial and residential real estate and transportation.
As the host jurisdiction, in Kenya, the Kenya Electricity Generating Company (KenGen) has just concluded raising a $270 million (Sh27 billion) rights issue to support further geothermal and wind energy expansion; we have an ongoing Development Real Estate Investment Trust (REIT) seeking to raise $30 million (Sh3 billion) for a commercial mixed use complex (to say nothing of the myriad cranes you find on every corner of this city), and the standard gauge railway (SGR) is projected to cost $5 billion (Sh500billion).
In this regard there is certainly no shortage of ongoing investment in sectors that are amenable to green finance.
As we deliberate on how to create a conducive environment for green finance, we must remain conscious that it does not end with green bonds and social and sustainability bonds but extends to greening banking practices, promoting inclusive insurance and leveraging technology to support inclusion, efficiency, transparency and reliability to ensure sustainability of the financial system.
This spectrum, therefore, calls for a great deal of innovation to promote sustainable business practices and responsible investment.
Once again turning to Kenya, it is noteworthy that the Kenya Bankers Association (KBA), in conjunction with the Central Bank of Kenya (CBK) has developed Sustainable Banking Principles while the KBA has joined the Sustainable Banking Network.
On the other hand, the Nairobi Securities Exchange (NSE) has become a Sustainable Stock Exchanges Initiative member and has committed to promoting sustainability in the scope of products it introduces as well as raising standards for listed entities on sustainability reporting.
Sustainable business
The Capital Markets Authority (CMA) in its own regard took a further step forward with the publication of the Corporate Governance Code for Issuers of Securities to the Public in March, which not only sets down clear principles and guidelines around ESG reporting but catered for the development of a Stewardship Code for institutional investors to take on greater responsibility for urging issuers to adopt sustainable business practices and a platform for those institutional investors to make clear public statements on their commitments to responsible investment.
It is expected this new Stewardship Code, which received a strong industry support, will come into force in the near future.
With Kenya being at the forefront of innovation and evolution of mobile-based financing solutions, we have the opportunity to move beyond the simple pursuit of inclusion with regard to the storage and transmission of money by phone to linking these solutions to facilitating the achievement of the Sustainable Development Goals (SDGs).
It is important to re-emphasise that the potential to fully leverage green finance is heavily reliant on the effective development and deepening of the capital markets and wider financial sector.
Funding SDGs
To this end, the capital markets industry in Kenya launched a 10 year Capital Markets Master Plan in 2014 which has set down aggressive milestones for market transformation running to the year 2023.
It is only through the timely achievement of the reforms relating to market infrastructure, product diversification; the legal, governance and reporting environment and the overall connectivity of the Kenyan markets to the regional and global financial system that we will be able to reap the fruits of green finance and ensure the markets can play their proper role in funding the SDGs and climate change.
Mr Muthaura is the CEO of the Capital Markets Authority . The article is an abridged version of his speech at the Sustainable Exchange Initiative Executive Dialogue on Green Finance in Nairobi.
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