Africa is fertile ground for the green bond market given its huge infrastructure needs and its exposure to climate change, and even though a lack of sophisticated capital markets may act as a barrier for issuance, pockets of growth are appearing in a handful of African nations.
Green bonds finance environmentally friendly projects such as wind farms or solar power, and while the market is growing rapidly, they make up a tiny fraction of the bond market. Africa itself accounts for a small slice of the global green bond market, accounting for just 0.08% of issuance in 2018, compared to 0.16% in 2017, according to S&P Global Market Intelligence data. The African green bond market totaled just $135.9 million in 2018, compared to the global green bond market of $168.5 billion. France alone, for example, issued €6 billion in sovereign green bonds in 2018.
Nonetheless, the asset class is emerging as an option on the continent. South Africa has taken the lead with the Johannesburg Stock Exchange initiating its own green bond segment in 2017, while Nigeria, with a March issue by Access Bank PLC, and Morocco, with the government-backed Casablanca Finance City issue in September 2018, are dipping into the market. Kenyan companies may well issue green bonds in 2019 after the Nairobi Securities Exchange issued new rules to develop a green bond market in February.
"There is a lot of noise, but it is a very low base. There is no doubt we will have quite a lot more issuance this year than last year, but we are not exactly in a crowded market...it’s all going to be further green shoots," said Sean Kidney, CEO of the Climate Bonds Initiative, who predicted interest from Ghana and Senegal as well issues from Kenya, South Africa and Nigeria.
Response to climate change
Green bonds could act as a mechanism to develop the infrastructure Africa needs to tackle the effects of climate change, such as rising seas and desertification.
"The African continent is probably the one that is struggling the most from climate change," said Tony Tiyou, CEO of Renewables in Africa, an organization that tracks large-scale solar projects. "Countries are less prepared than more mature markets, also there is a dearth of funding in order for them to develop the right infrastructure," he said, estimating that $10 billion to $20 billion was needed annually to mitigate the impact of climate change.
The JSE developed its green bond segment in response to the impact of climate change on the country's mining-heavy economy.
"It’s been very much on our minds here given the structure of our economy with extractive industries and given the social and economic challenges the country has had, having the notion of responsible investing really resonated in South Africa," said Donna Nemer, JSE's director of capital markets and group strategy.
Green bonds also offer an alternative to bank financing, she said, especially in a highly liquid market where South African institutional investors account for twice the assets of the country's banking sector, which stood at 5.25 billion rand end-2017, according to S&P Global Market Intelligence data. Nemer said there was a growing interest in environmentally friendly instruments from investors.
Lack of liquidity
However, liquidity and a lack of structured market may well prove barriers for green bond growth in the rest of the African continent, some experts say.
"You’ll see lots of rah-rah about the African bond markets and the green bonds in general but you have a layer of sobriety over it saying how much capital market activity is there actually in these countries," said consultant Gregor Paterson-Jones, who advises on infrastructure project bonds in Africa.
"The general capital market activity is relatively small and there is a lack of liquidity. You are never going a sudden explosion of green bonds simply because the infrastructure to have a general bond issuance is not there. There is no history and there is not a lot of trading," he said.
In addition, green bonds are more complex than traditional bonds because they have to adhere to a set of strict set of guidelines. The bonds would need to be priced correctly and take into account an issuer's risk profile, Paterson-Jones said.
The collapse of two Kenyan banks — Chase Bank (Kenya) Ltd. and Imperial Bank Ltd. — led to losses by the banks' bondholders and the debt market to dry up, and the country's market regulator blamed the lack of a clear compensation system for affected investors in a June 2018 report.
"It just shows you the lack of sophistication and oversight in a market like that can lead to the market just collapsing," Paterson-Jones said.
However, the JSE's Nemer said a lack of infrastructure could in fact be a stepping stone.
"You don't need sophisticated infrastructure for the bond market and so I think there is no reason why these other countries can’t leapfrog. They don't need a large sophisticated stock exchange to issue green bonds. That is the beauty of it," she said.
The green bond market worldwide has been dogged by a lack of supply owing in part to the more complicated nature of issuing a green bond. The process is more time-consuming, and the bond has to be independently verified as green.
But they could attract a different kind of investor to the African market such as socially minded asset managers and pension funds, instead of traditional investors such as development banks, experts say.
"The issue is having the sophistication and the skills needed to put together the monitoring and reporting system which can be a little bit cumbersome but if you are able to do that the benefits definitely outweighs the costs," Tiyou said.
Education will also play a big part, Kidney said. "Once people understand what assets they can use there is enthusiasm," he said, adding that pensions funds in Nigeria and South Africa were taking a lot of interest in the market. "The CEO of Access Bank is cock a hoop over their green bond."