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.
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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