According to the UN, the African continent would be one of the most badly affected regions in the world due to climate change, which will manifest itself in widespread water stress and diminishing agricultural yields across the continent, worsening food insecurity, hunger, and poverty.
However, a recent report from the Sustainable Finance Center at the Stockholm School of Economics emphasizes the role of green bonds—a relatively new, innovative financial product that raises funds for environmentally aligned sustainable development projects—in hastening climate change mitigation and adaptation.
Despite the promise of green bonds, the author shows that Africa’s private and governmental sectors have fallen behind other developing countries in issuing these innovative bonds.
Green bonds are distinguished by their environmental objective, although they have the same characteristics as common bonds regarding structure, risk, and expected returns. Green bonds, also known as climate bonds, were first issued in 2007 by the European Investment Bank and direct funding exclusively to projects with a favourable climate, environmental, and sustainability outcomes across various sectors, including energy, transportation, construction, agriculture, and water.
These initiatives range from renewable energy infrastructure to energy efficiency upgrades and low-carbon transportation and buildings. As shown in Figure 1, the worldwide market for green bonds exploded after 2013, with a more than 300-fold rise in issuance and a 104 per cent average annual growth rate between 2007 and 2019.
The author attributes the increased demand for investment vehicles that have good climate and environmental consequences to their reputational benefits and the market’s exponential expansion.
According to the Harvard Law School Forum on Corporate Governance, after the negotiation and signing of the Paris Climate Agreement in 2015, demand for green bonds grew significantly.
While the rapid expansion of green bond issuance indicates encouraging progress toward sustainable development, Africa has been the slowest to adopt these new financial vehicles, limiting its ability to raise supplemental funding for sustainable development across the continent. Figure 2 shows the breakdown of total green bond issuance by region from 2007 to 2018, with Africa accounting for only 0.4 per cent of market value.
The monies raised through green bond issuance have been disproportionately concentrated in South Africa within Africa. Figure 3 shows the percentage of green bonds issued by the country (on the left) and the usage of the proceeds (on the right) (right). South Africa dominates the continent by a large margin, with approximately three-quarters of the total market share.
When you include Morocco and Nigeria, these three nations account for more than 97 percent of all green bond issuance in Africa. Figure 4’s right panel illustrates that with 47 percent and 39 percent of the market share, respectively, climate-conscious energy and building dominate Africa’s use of green bond financing.
Projects like low-carbon transportation, resource conservation, and waste management fall under the “Others” category, receiving nearly a tenth of the funding.
The author maintains a positive outlook on the nascent green bond market in Africa and its potential to accelerate the achievement of the Sustainable Development Goals across the continent, given the increasing awareness of stakeholders—namely governments, agencies, municipalities, multinational development banks, and corporations—to the funding capacity of green financial products and a slew of new issuances in the pipeline.
Ken is a Quantitative Trader with experience in investments, quantitative finance, financial modelling and algorithmic trading in Global Investable Markets (GIM). He enjoys using Bayesian Statistics, Time Series and Machine Learning in developing Robust consistent Alphas in Equities Market, FX, ETPs and Derivatives instruments. He enjoys deep dives in understanding High Frequency Trading infrastructures and improving how the African financial markets work. He holds a Bachelor's in Actuarial Science from Strathmore Institute of Mathematical Sciences : An Executive Program in Algorithmic Trading (EPAT) certificate in Algo Trading from QuantInsti : A current MSc student in Financial Engineering at World Quant University.