Business

Why green bond devt should be sustained

There is need to leverage climate bond for more sustainable investments and to bridge infrastructural gap, CHRIS UGWU writes

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 as infrastructure services tend to raise productivity of other factors as it is often described as the unpaid factor of production. Although the Nigerian capital market has suffered monumental losses due to sustained decline in stock prices and resulting in huge decline in investment value occasioned by the financial crisis, the country’s huge infrastructural deficit in power, housing, roads, healthcare, port services among others have contributed to a large extent in retarding the overall growth and development of the sector which is center for 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, would be crucial to climate finance and deepen the sustainable finance eco-system to foster more sustainable investments. It would also intensify efforts on infrastructural development to enhance citizens’ standard of living. However, experts also believe that since the banking sources are unable to meet the growing financing need in Nigeria’s infrastructure, there is need to bridge the infrastructural gap through the green bond market to achieve the desired growth.

Current state of green bond market

Nigerian Exchange Limited (NGX) has said that the value of Nigeria’s green bonds market has grown to N55.52 billion within 2017 and 2021. The Chief Executive Officer, NGX, Temi Popoola, disclosed this during the Sustainable Finance Training 2021 hosted by NGX in collaboration with the International Finance Corporation (IFC), while adding that the Exchange was committed to fostering the growth of sustainable financial products which integrate the financial risks and opportunities associated with climate change and other environmental challenges. Popoola said sub-Saharan Africa was the least responsible for global climate change but remains one of the most vulnerable to the risk posed by climate change. Citing the World Meteorological Organisation State of the Climate in Africa Report 2020, he stated that the investment in climate adaptation for sub- Saharan Africa would cost between $30 billion to $50 billion each year over the next decade, or roughly two to three per cent of GDP. He revealed that the limited flow of climate finance remained a major issue for the implementation of mitigation and adaptation actions in Africa particularly Nigeria. He further stated: “In recognition of fithe climate finance needs particularly in Nigeria and the urgent action required to combat climate change as well as its impact as enshrined in the Paris Agreement on Climate Change, NGX in 2016 conceptualised and developed the Green Bond Product Paper, which was embraced and championed by the Debt Management Office and the Federal Ministry of Environment. “This effort led to the issuance of the maiden N10.69 billion ($25.8 million) 13.48 per cent 5-year green bond in 2017 to fund projects to develop renewable energy. This was sequel to the ratification of the Paris Climate Agreement by the Federal Government of Nigeria, which necessitated the need for long term capital to fulfill Nigeria’s Nationally Determined Contributions (NDCs) in reducing greenhouse gas emissions and ending gas flaring by 2030. “The second tranche, N15 billion ($36.1 million) 14.5 per cent seven-year Green Bond was issued in June 2019and was over-subscribed. The sovereign issuance paved way for corporate green bond market to emerge with N15 billion ($36.1 million) 15.5 per cent 5-year Fixed Rate Senior Unsecured Green Bond by Access Bank and N8.5 billion ($20.5 million) 15.6 per cent 15-year Guaranteed Fixed Rate Senior Green Infrastructure Bond by North South Power Company. “On 15 April 2021, North South Power Company (NSP) issued its second N6.33 billion ($15.3 million) 10-year 12 per cent Fixed Rate Series 2 Senior Green Bonds due 2031. It is noteworthy that all the corporate and sovereign Green Bonds are listed on NGX. “These follow-on issuances have further increased investible instruments and deepened the Nigerian Green Bond market. It is noteworthy that the size of the Green Bond market is currently N55.52 billion ($133.8 million).” “NGX remains committed to fostering the growth of sustainable financial products, which integrate the financial risks and opportunities associated with climate change and other environmental challenges,” he added.

Need to galvanise stakeholders

Nigerian Exchange Limited (NGX) had said that it would continue to leverage available guidelines, frameworks and resources in line with global best practices as it continue to facilitate and engage relevant stakeholders in the development of the sustainable finance markets in Nigeria and Africa at large. Mr. Jude Chiemeka, Divisional Head, Trading Business, Nigerian Exchange Limited, said as part of NGX’s on-going plans to go beyond green bonds, steps are in motion to galvanise stakeholders towards the sustainability agenda with NGX supporting capacity development and investor awareness through X-Academy, its specialised learning arm. X-Academy offers bespoke capital market and business courses including courses on development, issuance and listing of labelled bonds and other sustainability- linked instruments. In collaboration with leading market development and advocacy institutions such as Milken Institute, NGX hosts periodic webinars and market development initiatives aimed at further advancing the development of the green finance market in Nigeria and the SSA region as a whole. Chiemeka noted that owing to the leadership of NGX, the Nigerian green bond market grew from zero to N49.19 billion ($120 million) within a three-year period, recording four issuances and listings. “It’s important to note the critical role played by the apex market regulator – the Securities and Exchange Commission (SEC) – in setting the tone and creating the baseline for the green bond market in Nigeria. “In line with global best practice, SEC demonstrated leadership by publishing guidelines to spur the emergence of green bond corporate issues. In addition, starting with a sovereign green bond issuance created a benchmark for market participants and potential future green bond issuances. “Building on the green bond market successes, NGX signed a Memorandum of Understanding (MoU) with the Luxembourg Stock Exchange (LuxSE) to cooperate in promoting cross-listing and trading of green bonds in Nigeria and Luxembourg in 2019. This partnership has since yielded dividends with its first successful cross-listing of Access Bank’s N15 billion green bond on both NGX and LuxSE.”

Commitment to green economy

The Securities and Exchange Commission had 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. Director-General of SEC, Mr. Lamido Yuguda, who stated this in a goodwill message at the official launching 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 infrastructural gap in the country can be financed by harnessing resources available from sustainable fitnance 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 was 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 potentials 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 lowcarbon, 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 incentivizing 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

Authorities should focus on 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 programme of sustainability.

 

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