Green money: A summit to climb, By Natalie Beinisch
The green bond is more than a traditional bond and it is significantly more work to issue a green bond and comply with a green bond framework.
COP26 revealed the total failure of developed countries to live up to their commitment of channeling $100 billion per year towards the greening of the economies of the developing world. During the COVID-19 pandemic, when the wealthy countries ploughed more than $10 trillion towards the challenges that have primarily gone to benefit their citizens, this failure is made even more apparent and disappointing .
How do we address the jaw-dropping gaps between the green investment needs of Nigeria and the resources that are available to fund them? There are no easy answers. The path to a green economy is one with many forks in the road – different investment agendas involving different types of priorities, institutions and risks.
A top-down approach can help us to appreciate the scale of the task but it is both polarising and paralysing. Why do anything locally if needs are so substantial and international support is so flimsy?
Far less sexy and eye catching, flipping our gaze of green investment reverses from top-down to bottom-up reveals the incredible strides now being made to develop green investment opportunities in Nigeria. In doing so, we can also identify the limits of these opportunities and strategies to overcome them.
Green Bonds: An Extraordinary Step Forward for Green Finance in Nigeria
The Financial Market Dealers Quotation Group (most often referred to as FMDQ)’s green bond exchange is one example of such an incredible stride. Established in 2012, FMDQ provides financial market infrastructure that facilitates financial transactions by setting standards and improving information flows. It’s foray into the green bond market began in 2017, when it facilitated the listing of Africa’s first green sovereign bond, a N10.69 billion issuance by the Federal Government of Nigeria, whose proceeds are used for financing community-based clean energy provision and reforestation. Just over one year later, FMDQ facilitated Africa’s first non-sovereign green bond listing, a N10.69 billion issuance with Access Bank, for projects directed at solar, agriculture and flood defence. North-South Power followed suit, using the green bond framework to issue two separate bonds for solar and hydropower projects.
Through a partnership established between FMDQ and the Luxembourg Green Exchange, green bonds listed in Nigeria are now listed on the Luxembourg exchange, providing access to international investors. This is an opportunity that has been seized by pioneering issuers like Access Bank and in the words of Solape Hammond, Special Adviser to the Office of SDGs and Investment in Lagos State, it goes a long way to address the risks that constrain international investors from participating in Nigerian financial markets..
It takes a village to raise a child and it also takes a village to raise a green bond. FMDQ worked with multiple organisations to raise these first green bonds, including the UK-based non-profit, Climate Bond Initiative, FSD Africa, a U.K.-sponsored financial sector development programme, and local issuers and intermediaries, including Chapel Hill Denham. Such collaboration demonstrates that local and international institutions are doubling down on efforts to invest, with a focus on sustainability, in Nigeria. The depth of these efforts and the inter-organisation coordination is nothing short of Herculean.
The appetite for the GB listing has been very robust; it is oversubscribed. The strong institutional architecture and demand makes it a solid pathway to grow investments that are focused on the green transition.
Peaks and Valleys: Challenges and Opportunities
The first and most obvious challenge is that green bonds are not free money. As they need to be paid back and should not be terribly risky investments, this type of financing is most attractive to projects that are mature or/or require re-financing. The green bond is not a panacea and is just one among many types of financing instruments that need to function well to really support the green transition in Nigeria.
Secondly, and more importantly for the first-time issuer, the green bond is more than a traditional bond and it is significantly more work to issue a green bond and comply with a green bond framework, and there are not many tangible rewards for issuers to go the extra mile, as the coupon rates are comparable to those in the traditional bond market.
While the FMDQ’s assistance to issue bonds is substantial, with end-to-end support, this is not enough to move green issuances from virtue-signaling to a more mainstream financial market activity. Improving other competitive dimensions of green bonds for issuers could motivate companies to invest in green products and services within a framework that creates access, transparency and security for investors.
Implementing this is a challenge, but it is not insurmountable. The Climate Bonds Initiative recommends national governments to extend the same reporting and compliance requirements to all bond issuers. However, in a country like Nigeria where there is a higher priority to make all types of financial instruments more accessible, such an approach may be tricky.
Another strategy, successfully used in the United States, is public support for green asset-backed securitisation of smaller scale loans and projects. This requires a healthy volume of smaller green lending in the market. In this respect, it is imperative that investors work more closely across the value chain to create, identify and support potential green projects, so that relevant funding is available to them at every step of a project’s maturity. Luckily, organisations like the Impact Investors Forum have been established to provide this support.
The $100 billion headline is without doubt an attention-grabber that elicits a degree of nihilism, frustration and disappointment, but we can only reach the mountain’s summit from starting at the bottom. When we do this, we realise we are not climbing alone.