Why Africa Needs Green Bonds
The continent is currently being swept by a reinvigorated aspiration to pursue “Green and Inclusive Growth”. This aspiration is driven mainly by the interconnected challenges of social sustainability and inclusive economic growth which can be exacerbated by the problems of climate change and environmental degradation. However, it is also obvious that money will be needed in achieving the intended goals. The cost of climate change adaptation in Africa has been estimated in the range of US$20–30 billion per annum over the next 10 to 20 years.
Similarly, there are significant potentials in this pursuit within the infrastructure sector with estimates showing that investment opportunities in Africa’s infrastructure sector are up to US$93 billion per year.4 Available estimates show that in 2013, the annual global climate finance flows reached about US$331 billion out of which subSaharan Africa got only about 4%.5
In this context, Africa has been looking up to a plethora of concessionary, but sometimes uncertain, “climate funds” that are sourced from multilateral and bilateral donations which are seemingly hinged on international politics. Based on calculation using data extracted from the Climate Funds Update database; part of these “climate funds” that have been approved and as such earmarked for projects from 2002 till 2014 in Africa is close to US$3.4 billion. Ninety Seven percent (97%) of this is managed from multilateral sources and the ratio of grants to concessional loans is about 2:1.6
There are other emerging innovations for financing green and inclusive development initiatives. One of these is Green Bonds. Green bonds are used exclusively to fund projects that have environmental and/or climate benefits.
However, from investors’ perspective the debt recourse or financial backing, of the bond may or may not be strictly tied to specific green projects. In fact, the majority of green bonds are green “use of proceeds” bonds meaning they are backed by the issuer’s entire balance sheet. “Use of proceeds” structured green bonds therefore allow investors to benefit from investing in green initiatives without taking on additional risk of investing exclusively in specific green projects. For investors willing to have exposure to green project risk, there are green project bonds and green securitized bonds issued.7
By Uche Duru, Anthony Nyong
