How Green Investments can accelerate growth in the capital market and concurrently promote sustainable environmental practices that address climate change activities.
The global Green Bond market is estimated to hit US$1 trillion by the end of 2022 and $5 trillion annually by 2025 according to the Climate Bonds Initiative [1]. At end of March 2022, there were more than 220 issuers from 40 countries and more than 470 instruments valued at over US$210 billion that were certified by the Climate Bonds Standards. However, Africa recorded only 15 certified green issuances from six countries valued at US$2.47 billion. There is huge potential for climate-related finance activities in Africa and a study conducted by FSD Africa notes that "the emergence of the green bond market in Africa will provide the vital investment needed to fund the rapid and far-reaching transitions required to meet the commitments made in the Paris Climate Accords, and to prevent global temperature rise, across energy, land-use, transport, infrastructure and industrial systems."
Certified green bonds have been issued by banks, real estate development firms, power companies, counties and sovereign governments in Africa. In Nigeria, the solar, hydro and water sectors have been financed through green debt instruments, while solar, wind and water in South Africa; low carbon residential buildings in Kenya; low carbon commercial buildings in Côte d'Ivoire; solar in Morocco; and solar and wind in Mauritius.
Figure 1: Map showing African Countries with certified Green Bonds & Sectors (March 2022)
Source: Climate Bonds Initiative
Furthermore, the Covid-19 pandemic has further raised the profile of the climate finance discourse globally especially, concerning the US$100 billion in climate finance that was promised by rich countries in 2009, for which a large portion was earmarked for Africa to help adapt to climate change and mitigate further temperature rises. We note that the commitment to fund priority green projects in Africa by rich nations and international investors is still upbeat given the recent successes of the landmark green bonds issued in Nigeria, Kenya and South Africa. However, the lack of structure and framework for these investments has impacted the level of capital flows to the continent.
While we recognise that there is huge potential for green projects in Africa, the main bottleneck is the certification of these projects and their alignment with the United Nations Sustainable Development Goals (SDGs) and the Paris Climate Agreement. The rising occurrence of 'greenwashing [2] stokes risks in the climate finance market, hence the imperative for verification of green projects by Approved Verifiers. Also, part of the challenges associated with issuing green bonds (and attracting green investments) in Africa has been the knowledge gap and the availability/access to a limited pool of foreign verifiers.
Table 1: Details of Certified Green Bonds in Africa as at 31 March 2022
Source: Climate Bonds Initiative
The International Capital Market Association (ICMA) [3] instituted the governing principles as well as the process guidelines for the issuance of green, social or sustainability-linked bonds. The governing principles of the ICMA which are applicable for Green, Social or Sustainability Bonds rest on four main pillars: Use of Proceeds; Process for Project Evaluation and Selection; Management of Proceeds; and Reporting. In addition, the ICMA has developed flexible and voluntary process guidelines that recommend transparency and disclosure and promote integrity in the development of the market by clarifying the approach for issuance of a labelled bond. These guidelines emphasize the required transparency, accuracy and integrity of the information that will be disclosed and reported by issuers to stakeholders through core components and key recommendations which include the use of external reviewers to promote standardization and integrity of the market.
There are four main methodologies for external review of Green, Social or Sustainability-linked bonds which include Second Party Opinion (SPO), Certification, Assurance and Scoring/Rating. Each of these methodologies is intended to promote the standardization and integrity of the market for the issuance of bonds. However, the Second Party Opinion and Certification external review methodologies are the most popular for obtaining independent third-party reviews of the bonds, projects and assets globally.
Importantly, Certification under the Climate Bond Standard confirms that the Bond, loan or other debt instrument is fully aligned with the Green Bond Principles. It also confirms that best practices have been used for internal control, tracking, reporting and verification and finally that the assets being financed are consistent with achieving the goals of the Paris Climate Agreement of a 1.5oC global warming limit.
Under the Climate Bond Standard Certification Scheme, the following sectors are eligible for certification which includes Solar, Wind, Marine, Geothermal, Bioenergy, Recycling, Forestry, Buildings, Water, Waste, Transport, Agriculture & Shipping. The assets and projects are measured against a defined eligibility sector screening criterion (CBI Taxonomy). Figure 2 shows the eligible instruments for certification while figure 3 depicts some eligible assets previously certified under the Climate Bond Standard Certification Scheme.
Figure 2: Eligible Instruments for Certification
Source: Climate Bonds Initiative
Figure 3: Some eligible assets for Certification
Source: Climate Bonds Initiative
The certification process (for one-time or programmatic issuances) comprises five key steps for the Issuer: identifies the assets and develops the Green Bond framework; engages an Approved Verifier to conduct pre-issuance verification and obtains a verifiers report; submit verifiers report alongside information form to obtain certification from the Climate Bond Standard and issues a Climate Bond or instrument; engages the verifier to conduct a post-issuance certification within 24 months of issuing the instrument; and reports annually to the Climate Bond Initiative on continued compliance.
Verification by an Approved Verifier is mandatory in the Certification process. In addition, the Verifier does not decide on the Certification of the bond, loan or debt instrument. All certification decisions under the Climate Bonds Standard & Certification Scheme are made by the Climate Bonds Standard Board based on the information provided by the Issuer to CBI, including the Approved Verifiers Report.
Agusto & Co. as an Approved Verifier is uniquely positioned to provide knowledge and support for issuers who intend to raise funds for environment-friendly projects at a lower cost when compared to foreign counterparts. Also, as part of our advocacy work for promoting the idea of 'greenium [4] ' and tax incentives for issuers and investors of green issuances, we will be championing the development of green finance and sustainable investments framework with other key stakeholders in Africa as we collectively seek to rescue our continent from the adverse impacts of climate change.
, United Nations Sustainable Development Goals that align with the Certification under the Climate Bonds Standard
[2]'Greenwashing' is the idea of providing misleading information (or unsubstantiated claim) about how a company's products, projects and activities are environmentally friendly.
[3] The ICMA is a self-regulatory organization and trade association for participants in the capital markets aimed at promoting resilient well-functioning international and globally coherent cross-border debt securities markets, which are essential to fund sustainable economic growth and development.
[4] 'Greenium' is the concept that issuers are able to obtain a cheaper cost of funding by issuing debt with a specified 'use of proceeds' that have positive environmental and/or social impacts