Green Bonds and Why They Are Rapidly Growing in Africa

The concept of green bond emerged around 2007 when the European Union’s (EU) lending arm, the European Investment Bank (EIB) issued it the same year, followed a year later by the World Bank. Many governments and corporations have entered the market to finance green projects since then.

A green bond, used interchangeably with a climate bond, or a sustainable bond is a fixed-income instrument specifically created to implement identified environmental and climate-related projects. In summary, sustainable bonds target projects in the area of energy efficiency, pollution prevention, sustainable agriculture, fishery and forestry, the protection of aquatic and terrestrial ecosystems, clean transportation, clean water, and sustainable water management. In addition, these bonds may be acquired to finance the development of environmentally friendly technologies and the mitigation of climate change.

To enhance their attractiveness to investors, these bonds mostly come with tax incentives. A primary issuer of green bonds is the World Bank, with approximately 164 green bonds, cumulatively worth US$ 14.4 billion issued since 2008. According to the Climate Bond Initiative, the total issuance of green bonds in 2020 was worth almost US$ 270 billion, with a cumulative issuance since 2015 of over US$ 1 trillion.

Stock exchange markets play a vital role in providing market access to green bonds. In this respect, many stocks exchange markets, such as the Nigerian stock exchange have launched dedicated green bond sections for green projects.

The Financial Sector Deepening Africa (FSD Africa) aided by the UK government, supports green bond programs in Kenya and Nigeria. The objective of this is to spawn the market for green bonds in these two primary African economic hotspots. This was achieved through a collaboration between the Kenyan and Nigerian Securities Exchanges, the Kenyan Bankers’ Association, the FMDQ OTC Exchange, the Climate Bonds Initiative, and the World Wildlife Fund.

The African Development Bank (AfDB) on September 6, 2022, issued its first green bond in South Africa worth US$ 11.69 million, aimed at supporting green financing in African countries. Other African countries such as Ghana, are working on launching green bonds to raise funds for investments that meet the Sustainable Development Goals or commitments to combat climate change.

Although green bonds inherently come with transaction costs due to the necessity of issuers to track, monitor, and report on the use of proceeds, many issuers neutralize this initial cost by highlighting their green business, engaging in positive marketing stories, and diversifying their investor base. Consequently, this facilitates the easy acquisition of funds for climate-related projects.

The market for green bonds was developed around the idea of flat pricing, where the bond price is the same as ordinary bonds. This is due to the fact that the credit profile of green bonds is the same as other standard financial instruments from the same issuer. For this reason, green bonds rank equally as standard financial instruments.

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.