As the consequences of global warming are multiplying across the globe, green bonds have become popular among several nations as a leading means of mitigating the impacts of climate change in accordance with the Paris Agreement. Africa has not been left behind in this wave of initiatives aimed at building green bonds as an enabling path towards enhancing the transition to a sustainable and prosperous economy.
In Africa, Nigeria issued its first sovereign green bond in December 2017- the first one in the African continent. In Kenya, the Green Bond Program which was established to develop a domestic green bond market is on progress under the leadership of the Kenya Bankers’ Association, Nairobi Securities Exchange Climate Bonds Initiative and Financial Sector Deepening Africa, in collaboration with the Dutch development bank FMO and the International Finance Corporation.
According to Climate Bonds Initiative, the green bond market has grown significantly in the past few years, with the market commencing in 2014 when USD37Bn was issued. In 2017 issuance reached USD162.5Bn. This momentum has been persistent with over USD419Bn in green bonds currently outstanding. There are projections for issuance to reach USD200-225Bn in 2018.
Before delving deeper into what the future holds for green bonds and other sustainable finance instruments, let us examine the meaning of green bonds. Climate bonds are fixed-income financial instruments created to fund projects that have positive environmental and/or climate benefits. Overall, green bonds are regular bonds with one distinguishing feature: proceeds are earmarked exclusively for projects with environmental benefits, mostly related to climate change mitigation or adaptation but also to natural resources depletion, loss of bio-diversity, and air, water or soil pollution.
Green Bonds in Africa
Johannesburg Stock Exchange (JSE) has an established Green Bond segment established  to unlock the investment potential of green infrastructure, technologies and services. Growth point Properties was the first corporate in South Africa to issue a green bond in JSE in March, 2018. The R1.1 billion ($94 million) Green Bonds issued by Growthpoint will be used to fund the green buildings and green initiatives in South Africa.
The Kenya’s National Green Economy strategy postulates that Kenya needs approximately $24Million to kickstart the transition to sustainable economy in sectors such as afforestation, renewable energy and public transport. The Green Economy Strategy and Implementation Plan (GESIP) identifies green bonds as one of the channels for raising funds required to support this transition. A new study commissioned by Strategic Business Advisory (SBA) in partnership with the Kenya Bankers Association revealed that Kenya’s demand for climate-friendly bonds will accrue to KES 91 billion in the next five to 10 years. This opportunity will attract major investments in transport and agriculture with the biggest green-financing demand within that period being bus rapid transport (BRT) in Nairobi and Mombasa with the projection that it can raise up to KES 36 billion.
Benefits from Green Bonds
Despite the increase in uptake of Green Bonds across Africa and the world at large, little is known about the impact of these bonds. Do they have the ability to yield positive environmental results? Are they beneficial to the issuing companies? Well, I can confidently respond to these questions with a conclusive yes.
In her analysis of 217 corporate green bonds issued by public companies globally from January 1, 2013 to December 31, 2017, Caroline Flamer discovered that they lead to positive stock market reaction, improved financial and environmental performance, an increase in green innovations, and an increase in stock ownership by long-term and green investors.
- Improved financial performance to the issuer
Firms that offer green bonds realizes a 2.4% increase in long-term value as measured by the ratio of the firm’s market value to the book value of its assets. Again, issuers of green bonds attract more improvement in operational performance as measured by the return on assets as compared to firms that issue non-green bonds.
- Improved environmental performanceÂ
Many studies firms tend to easily balance financial returns with environmental benefits after issuing green bonds. A recent study shows that the environmental performance score of the issuers rose 6.1 percentage points on the Thomson Reuters’ ASSET4 scale. The firms also indicated a reduction of more than 17 tons of CO2 per $1 million of assets. Moreover, this enhanced their reputation which attracted strong investor demand.
- Increase in ownership by long-term and green investors
Corporate green bonds attract investors who are concerned with  the long-term and sustainability. Issuers of green bonds are more oriented to the longer time horizons hence benefiting from the shares of long-term investors. The Green bonds also enables such investors to benefit from hedging against climate policy risks.
Overall, there are indications everywhere that green bonds trigger a positive market response, helps investors to balance financial returns with environmental benefits, satisfy Environmental, Social and Governance (ESG) requirements for green investment mandates, improves investor diversification and attract buy-and hold investors.
Despite the significant promise held by green bonds as an emerging impact investment instrument in corporate finance, there are some barriers that need to be addressed to see its growth in Africa. The need for an enabling policy environment in majority of African countries is a concern, inadequate data on sustainable investment opportunities and technical know-how is a key hindrance to the scaling up of the green bonds market in the continent.
