Business

Leveraging green bond for sustainable finance eco-system

There is need to leverage green bond in order to foster more sustainable investments and bridge infrastructure gap. CHRIS UGWU writes

 

 

According to World Bank report, the world is facing an enormous bill to address the potentially apocalyptic issue of climate change.

Climate change could push an additional 100 million people into poverty by 2030, if no action is taken to end extreme poverty, improve access to basic services and build resilience. Millions of people around the world are being forced to live with extreme weather events such as droughts and floods putting food and water security at risk.

 

All over the world, infrastructure contributes to economic development by increasing productivity and providing amenities, which enhance the quality of life. The services generated as a result of an adequate infrastructure base will translate to an increase in aggregate output.

 

However, investment in infrastructure services such as transportation (roads), electricity and water are intermediate inputs to production, this is because infrastructure services tend to raise productivity of other factors as it is often described as the ‘unpaid factor of production.’

 

Although, Nigerian capital market had suffered monumental losses due to decline in stock prices, the country’s huge infrastructural deficit in power, housing, roads, healthcare and port services, among others, has contributed to a large extent in retarding the overall growth and development of the sector, which is central to capital formation.

 

Meanwhile, against this backdrop of the comatose state of the economy, governments and capital market operators have agreed that tapping into the green bond market, which has gained global acceptance, will be crucial to climate finance and deepen the finance eco-system and foster more investments. It will also intensify efforts on infrastructure development to enhance citizens’ standard of living.

 

However, experts also believe that since the banking sources are unable to meet the growing financing needs in Nigeria’s infrastructure, there is need to bridge the gap with the green bond market to achieve the desired growth.

 

What is a green bond

 

Green bond, according to Investopedia, is a tax-exempt bond issued by federally qualified organisations or by municipalities for the development of brownfield sites. Green bonds are created to encourage sustainability and the development of brownfield sites.

 

More specifically, green bonds finance projects aimed at energy efficiency, pollution prevention, sustainable agriculture, fishery and forestry, the protection of aquatic and terrestrial ecosystems, clean transportation, sustainable water management and the cultivation of environmentally friendly technologies.

 

The tax-exempt status makes purchasing a green bond a more attractive investment compared to a comparable  taxable bond, providing a monetary incentive to tackle prominent social issues such as climate change and a movement to renewable sources of energy.

 

Green exchange

FMDQ Securities Exchange in a bid to deepen sustainable finance in Nigeria launched the pioneer Green Exchange in Africa – FMDQ Green Exchange, introducing a platform specifically for green and sustainable securities.

 

FMDQ Green Exchange, a virtual information repository platform, was dedicated to driving the growth of green and sustainable securities and providing reliable green data in the Nigerian financial markets – through promoting transparency, good governance and compliance – by showcasing securities issuances that align with global Environmental, Social and Governance (ESG) principles.

 

Mr. Bola Onadele Koko, Chief Executive Officer, FMDQ Group, during his opening address, said: “With climate change increasingly becoming one of the biggest risks facing the world today and in recognition of an even greater need to promote economic development in Nigeria through green and sustainable finance, FMDQ Group considered it pertinent to launch the FMDQ Green Exchange initiative.

“We are indeed proud to note that the launch of Nigeria’s premier Green Exchange places Nigeria and, by extension, Africa, amongst other global jurisdictions with securities exchanges with such exclusive platforms, such as the Luxembourg Stock Exchange, which launched the world’s first and leading dedicated platform for sustainable finance (the Luxembourg Green Exchange), amongst others.”

 

Delivering his keynote address, the Executive Governor of Lagos State, represented by his Special Adviser on SDGs and Investments, Mrs. Solape Hammond, said: “The value that a Green Exchange such as this brings, providing investors a transparent, effective platform for accessing the African sustainability finance market and thereby opening the doors of deep sustainable funds for infrastructure and social development, is almost immeasurable.

 

“There is therefore no doubt that the FMDQ Green Exchange will assist in unlocking sustainable resiliency.”

He also reiterated Lagos State’s commitment to championing and supporting initiatives geared towards the sustainable socio-economic development of Lagos State and the nation at large.

In an equally exciting development poised to further deepen the Nigerian debt capital market and, as a highlight of the launch ceremony, FMDQ Exchange and the Luxembourg Stock Exchange (LuxSE) executed a Listing Agent and Cooperation Agreement to facilitate the dual listing of securities issued by financial institutions and corporates domiciled in Nigeria on both FMDQ Exchange and LuxSE markets.

Speaking on this development, Ms. Julie Becker, Chief Executive Officer, LuxSE, stated: “We are pleased to enter into this cooperation agreement with FMDQ Exchange and will work together to create synergies and connections across our markets. I would like to congratulate FMDQ Exchange on the launch of the FMDQ Green Exchange and I look forward to further exploring new fields of cooperation in the area of green finance.”

 

Lauding the initiative, Ms. Tumi Sekoni, Managing Director, FMDQ Exchange, said: “Indeed, we are excited to be executing a listing agent & cooperation agreement with LuxSE and hopeful that this partnership will birth an avenue for FMDQ Exchange and LuxSE to achieve formidable market cooperation and promote even greater information symmetry for the benefit of the Nigerian and global financial markets.”

 

SEC’s commitment

 

The Securities and Exchange Commission also stated that it would continue to strive to deliver coordinated and coherent policy advice, capacity building and regulatory support to build the momentum for a green economy. Green finance has been defined as any structured financial activity that has been created to ensure a better environmental outcome.

 

Director-General of SEC, Mr. Lamido Yuguda, who stated this in a goodwill message at the official launch, ceremony of the FMDQ Green Exchange, said the Commission remained a strong advocate for the promotion of infrastructural development through sustainable financing as it believes that the huge budget deficit and infrastructure gap in the country can be financed by harnessing resources available from investors and interest groups around the world.

 

He said: “Without doubt, there are tremendous opportunities in the areas of power generation and transmission,  rail  transportation, housing, agriculture and water, among others, where sustainable financing can be an avenue for the private sector to partner with government in the overall drive for prosperity and economic development.

 

“The Commission had, in December 2018, released the rules on Green Bonds to support the issuance of debt instruments with positive impact on the environment.

 

“Although the Nigerian capital market has recorded some green bond issuances, there is ample room for additional issuances as stakeholders within the sector can do more in terms of green and sustainable finance; especially considering the available global investment opportunities and our domestic development needs.”

 

The SEC DG said the launch of the FMDQ Green Exchange as a platform for the collection and dissemination of data and information on green and sustainable securities for transparency purposes is a step in the right direction. He disclosed that ESG factors formed key components in qualitative market research, valuation of equities and fixed income securities, portfolio construction and asset allocation and expressed excitement with the contribution of the FMDQ, which will enhance these aspects of the capital market.

 

According to him, “effective ESG reporting can fuel strong capital markets, as high standards of disclosure and transparency are a critical part of the requirements in ESG investing. The performance of this platform will be a testing ground for the enormous potential ahead.

 

“The United Nations recognises that green financing plays a major role in delivering a number of its Sustainable Development Goals. The on-going 2021 United Nations Climate Change Conference underscores the transition to a low-carbon, more resource efficient economy and in building a financial system that stimulates sustainable growth across nations.

 

“There is enormous capacity for the financial system to fund the transition to a green economy. For this to happen, the right conditions and incentives need to be in place.

 

“These include incentivising market participants to be more conscious of long-term risks and opportunities; Improving access for retail investors, and supporting institutional investors to direct their capital towards a long-term impact; enhancing trust in green financial products, by giving clear and reliable information to those who invest in them and providing the necessary regulatory and policy support to create an enabling environment for innovative ideas in green finance to thrive.”

 

Yuguda said FMDQ for some years now had earned for itself a reputation for innovation in the Nigerian capital market with the introduction of new products, platforms, processes and even players adding that sustainable finance has come to stay and the benefits would be visible in the improvements to Nigeria’s physical and economic environment.

 

Last line

Government needs to focus strongly on institutional policy changes and sector reforms.

 

This is essential towards improving the investment climate capable of attracting private investors at the level that can meaningfully aim at financing the nation’s infrastructure deficit and meeting its strategic program of sustainability over a more attainable time line.

 

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