CLIMATE FINANCE: The Green Bond Revolution

Climate Change

The rising need to address climate change requires concerted effort across the globe. Global warming has exhibited acute repercussions and slowing down its progress is critical to the future of the planet and the existence of humanity.  Erratic rainfall patterns, rising sea levels and frequency of weather-related disasters can all be attributed to climate change. These factors pose a serious risk to the livelihoods of hundreds of millions across the globe especially in developing countries.  Agriculture is the backbone and a key contributor to economic growth and development in these regions. Climate change threatens to reverse hard-earned development achievements.

Threat posed

Severe drought is ravaging East Africa, sea levels are rising and air pollution is choking residents of cities in China. A new report has revealed that the earth is warming much faster than previously thought. According to The Guardian, a new type of sensing device (the Agro float system) used to measure ocean temperatures has shown that earth’s oceans are warming 13% faster than previously thought, and accelerating. The World Meteorological Organisation (WMO) reported that record-breaking heat made 2016 the hottest year ever recorded. According to WMO, unprecedented heat across the globe, exceptionally low ice at both poles and surging sea levels are pushing the world into “truly unchartered territory”. This news comes at a time when the Environment Protection Agency (EPA) is facing a possible budget cut and the guy at its helm dismissing a basic scientific understanding saying he does not believe carbon dioxide is a primary contributor to global warming. Pundits believe that more needs to be done in terms of investment in climate research and observation.

Green Bonds

The World Bank launched the “Strategic Framework for Development and Climate Change” in 2008 to coordinate private and public sectors in the fight against climate change. One of the innovations being used in this framework to support World Bank lending to projects that seek to mitigate climate change is the Green Bond. Since their inception in 2008, green bonds have been growing steadily by double digit rates with a projection of US $120bn of green bond supply in 2017.
The funds raised from this form of ethical investment, guided by the Green Bond Principle (GBP), go towards sustainable projects in a wide array of categories. The categories for eligibility for green bond funding include but are not limited to; pollution prevention and control, renewable energy, sustainable management of living natural resources, energy efficiency, terrestrial and aquatic biodiversity conservation, clean transport, climate change adaptation, sustainable water management and eco-efficient products, production technologies and processes. GBP does not dictate which projects to be funded. The selection criterion follows the clearly stipulated guidelines and independent analysis from selected institutions.

The Impact

According to a leading European research bank in a research note on the market, demand for green bonds continues to outstrip supply. The impact of green bonds ultimately lies on the projects the proceeds go to fund. According to World Bank data on impact of its portfolio, two energy saving projects in China, through US $400 million in funding from green bonds, are expected to save 12.6 tons of carbon dioxide (CO2) equivalent annually. Performance and quality of the underlying projects will determine their impact.
In the wake of expensive debt financing, Africa is following in the footsteps of the rest of the world in banking on capital markets to fund green projects. Morocco and South Africa are blazing the trail as Kenya and Nigeria follow suit. Morocco’s green bond is valued at 1.15 billion dhirams (US $18m). According to the Moroccan Agency for Solar Energy (Mansen), the bond will fund three schemes with a total capacity of at least 170 megawatts. South Africa also issued a US $71 million green bond through the International Finance Corporation (IFC) to finance growth of green industries and energy efficient industries. This is in line with South Africa’s ongoing commitment to sustainability.

Nigeria plans to raise 20 billion naira ($63 million) by March 2017 to help fund renewable energy projects. Nigeria is Africa’s most populous nation with a population of 180 million people and according to the Budget and National Planning Ministry; it needs more than 6 trillion naira, the equivalent of almost its entire annual budget, to wad its budget deficit.

Kenya seeks to turn to the capital market and raise the funds needed to invest in renewables. Kenya plans to float its first ever green bond to finance green projects. Off-grid renewable sources of energy such as solar power are preferred to the traditional power technologies.


Bottom line

The report released by the World Meteorological Organization has been described by some as startling. According to Reuters, the volume of green bonds with proceeds earmarked for investments such as wind farm or a low carbon transport network nearly doubled in 2016. This year might see a further acceleration in sales with France set to become the first G7 country to join the green bond revolution bandwagon. Observers suggest that should enthusiasm slow in the United States, China may be able to pick up some slack.

The green revolution is shaping up and investors seem upbeat going by the amount of capital set aside to invest in this growing niche. Sustainability is a long-term agenda that requires nations to speak with one voice with regards to the reduction of emission of greenhouse gases and curbing environmental degradation. The green bond phenomenon is making it more efficient and effective for governments and stakeholders to raise the much needed funds to combat global warming and climate change.

Leave a Comment

featured imageIntra-African trade