Africa poised for green bond growth

Africa has generally lagged behind even other emerging market regions in attracting green finance. This is partly because of a lack of interest from institutional investors but also because the sectors that would benefit most, led by wind and solar power, are less developed on the continent than elsewhere in the world.

However, with the renewables sector now starting to take off, green bonds are creating an opportunity for Africa to generate more of the finance it needs for renewable energy projects itself, although it still relies on non-African investors to buy many of the bonds on offer. 

Green bonds provide an opportunity not only for governments and companies to raise finance but also to support the sustainable development goals (SDGs). As defined under the Green Bond Principles, a green bond is “any type of bond instrument where the proceeds will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible green projects”.

The proceeds have to be used to finance projects in areas such as energy efficiency, renewable energy, low-carbon transport, green buildings, smart grids and climate-smart agriculture and forestry. Otherwise, green bonds have the same features as traditional bonds in terms of structure, risk and expected returns. Beneficiaries from public deals at least are usually required to publish an annual sustainability report, including a range of demonstrable metrics.

Africa has some of the world’s most attractive solar resources, untapped geothermal capacity and many unexploited wind sites, so there are plenty of natural resources to justify renewable energy projects utilising green bond finance. At the same time, roughly half of the population still lacks any access to electricity at home and many of those who do experience intermittent supplies.

Solar and wind power development and operating costs have fallen in conjunction with rising plant efficiency but the most important missing piece in the equation is the lack of financing and it is here that green bonds can play an important role, including with regard to attracting partner financing.

The market

The first green bonds were issued by the European Investment Bank in 2007 and there was a 300-fold increase in issuance between 2007 and 2019, but this wave of interest had limited impact in Africa. The continent’s first sovereign green bond was a fairly modest affair, with Nigeria raising $29m in 2017.

A total of $3.96bn of green debt had been issued in Africa by August 2021 but the market remains fairly narrow. According to figures from the Brookings Institution, Africa as a whole accounts for just 0.4% of global green bond issuance, a figure far below its 17% share of global population and even its 3% share of global GDP.

International financial institutions are often reluctant to invest in the region but doubly so via instruments that are relatively new. Crises such as the Covid-19 pandemic and the Russian invasion of Ukraine make them even more hesitant to invest in what are still considered to be niche forms of debt in frontier markets. However, as shareholders demand increased investment based on positive environmental, social and governance (ESG) impacts, African green bonds could become increasingly attractive.

As with some other instruments, the role of the African Development Bank (AfDB) has been key in supporting growth in African green bonds. The AfDB’s strategy is based on two objectives: promoting inclusive growth and ensuring that that growth is sustainable, “by helping Africa gradually transition to ‘green growth’ that will protect livelihoods, improve water, energy and food security, promote the sustainable use of natural resources and spur innovation, job creation and economic development”.

The multilateral’s priorities include building resilience to climate shocks; providing sustainable infrastructure; and making efficient and sustainable use of water and other natural resources. The AfDB’s green bond programme was launched in 2013 to support these policies, with bonds issued every year since then apart from 2020, at the height of the Covid-19 pandemic. Bonds have been issued in US dollars, Australian dollars and Swedish krona, although none yet in African currencies.

Notable bonds

Over 70% of Africa’s green bonds have been issued in South Africa, with Morocco and Nigeria responsible for a further 23%, but other countries are entering the market. Most recently, in July 2021 Benin sold a €500m 14-year SDG bond, suggesting that smaller economies can also consider such bonds as a source of financing. 

Given the success of the issues to date, including the number of governments that have expressed an interest in issuing green bonds, it seems likely that the market will take off in the near future at least with regard to sovereign debt. Other issuers include the Moroccan Agency for Sustainable Energy, which issued Africa’s first certified climate bond in 2016, raising $104m, and the West African Development Bank (BOAD), with €750m last year.

Most African corporate green bonds to date have been issued by banks, particularly in South Africa. Most recently in January, South Africa’s Nedbank issued a green bond in conjunction with the International Finance Corporation (IFC) to raise R1.09bn ($75m) to build environmentally sustainable housing.

In a statement, the IFC said: “Increasing green housing finance, particularly in the residential sector, is essential to support the decarbonisation of South Africa’s energy sector, while contributing to economic recovery and addressing the country’s large housing deficit.” Nedbank issued its first green bond in 2019 to raise finance for renewable energy projects.

Nigeria’s Access Bank issued a N15bn ($36m) green bond in March 2019 to finance environmental resilience, clean energy and sustainable land use projects, including the construction of flood defences to protect Eko Atlantic City, a development outside Lagos. With a five-year tenor, it took the form of the first certified climate bond in Africa. Certified by the Climate Bonds Initiative, it was supported by the Nigerian Green Bond Development Programme, a federal-government backed initiative.

While Nigeria and South Africa eventually opted to set up dedicated segments within their existing stock exchanges, in February the government of Ghana launched a dedicated green bond platform called the Green Exchange “to enable companies to issue billions [of US dollars] in green bonds and for investors to trade the debt in a secondary market”. 

The new exchange was developed with the support of the IFC and Ghana’s Securities and Exchange Commission. IFC country manager for Ghana, Ronke Ogunsulire, said: “Finding new avenues for green financing is a key priority for IFC. Our partnership with the SEC to design the framework for green bonds in Ghana will, in turn, help Ghana achieve its climate goals with projects that create jobs and spur growth.”

Developing functioning green bond markets requires the creation of supporting infrastructure. For instance, the Nigerian market was boosted in March by the appointment of African credit ratings agency Agusto & Co by the Climate Bonds Standard Board as an approved verifier.

Agusto CEO Yinka Adelekan commented: “This will facilitate the uptake and quick issuance of green bonds by companies and governments in Nigeria and in Africa as well as promote sustainable and best environment-friendly practices that align with the United Nations Sustainable Development Goals (SDGs) and the Paris Climate Agreement.”