This article is the concluding part of an earlier publication in our last quarter’s newsletter. It will provide an overview of the regulatory terrain for the issuance of green bonds globally and in Nigeria, in particular.
Regulatory framework - International
The international regulations on green bonds are voluntary and non-binding guidelines formulated by non- governmental organisations. These include the International Capital Market Association (“ICMA”), the Climate Bond Initiative (“CBI”) as well as private banks and credit rating institutions which have set-up indices to assist investors to benchmark the performance of green bonds.
The ICMA’s Green Bond Principles
The Green Bond Principles (“GBP”) are the most prominent international guidelines on green bonds. The GBP are anchored on transparency and full disclosure to all stakeholders to promote integrity in the issuance of green bonds. The four central components espoused in the GBP include the following:
- Use of proceeds: A clear description of the use of proceeds for environmental benefits (as assessed by the issuer or a third party) should be provided in the legal documentation for the green bonds.
- Process for project evaluation and selection: The eligibility criteria and process for determining how the projects fit within the green projects categories and the environmental sustainability objectives should be indicated in the project documents. It is also recommended that the process of project evaluation and selection be supplemented by external review.
- Management of proceeds: The administration of the net proceeds of the green bonds should be clearly tracked by the issuer either by crediting same into a sub-account/sub-portfolio. This process should be verifiable through a formal internal process and an independent audit.
- Reporting: It is essential that regular updates on the allocation of the proceeds and the impact of the project be undertaken. Also external review, verification certification and rating of the project by relevant professionals is recommended. It is also recommended that the external review or an executive summary of same be made public.
The CBI’s Climate Bond Standards and Certification.
The Climate Bond Standards and Certification encompasses the GBP but also includes other existing standards in environmental bonds. The green bonds are certified against general Climate Bonds Standard and a number of sector specific standards that provide detailed eligibility criteria for different sectors. These sectors include solar energy, wind energy, low carbon buildings, low carbon transport, water, and energy efficiency. Issuers are required to obtain the certification before issuing the bonds and to comply with post-issuance requirements covering compliance and allocation of proceeds, within one year of issuance. A post -issuance certificate is valid for the duration of the certified bond, provided that issuers continue to meet the requisite annual reporting requirements.
Green Bond Indices.
Given the increasing popularity of green bonds, banks and credit rating agencies have developed indexes to monitor green bond market performance. The most notable are the indexes issued by the Barclays/MSCI, Standard and Poors /Dow Jones and Bank of America Merrill Lynch. The indexes are developed against the GBP and the Climate Bonds Standards, and will analyze a bond’s green credentials to establish eligibility, and allocation of proceeds. The requirements to qualify as green bonds differ with each index.
Regulatory framework – Nigeria
Generally, there is no specific regulation governing green bonds in Nigeria. Accordingly, issuers resort to the general legislation for the issuance of bonds in Nigeria as well as the international regulations for guidance. The Nigerian legislation includes:
- The Investments and Securities Act, 2007;
- Rules of the Securities and Exchange Commission, 2013 (“SEC Rules”);
- Listing requirements of the Nigerian Stock Exchange; and
- The Companies and Allied Matters Act, CAP C.20 LFN, 2004.
In our view, the current legal framework in Nigeria accommodates the issuance of green bonds in the domestic market provided the basic requirements in Part K of the SEC Rules are complied with.
Part K of the SEC Rules requires the following: satisfactory feasibility studies in respect of the project; good credit rating and track record to attract investment amongst others. Also for government issued bonds, an enabling law, a sinking fund, confirmed irrevocable standing payment order authorizing the deduction of the principal and interest from the statutory allocation of the State/Local Government (unless waived by Nigerian Securities and Exchange Commission(SEC)) amongst others.
Additional requirements for any government, public liability corporate entity or multinationals are a good financial record and as well as a good rating.
Green bonds hold significant potentials in the Nigeria energy industry, it is imperative that the SEC issues relevant regulations/ directives in line with international best practices. Such directive may clearly delineate projects eligible for green bonds with precise standards and measurements criteria.
In the interim, interested issuers can tap into the burgeoning green bonds market and it is advisable to comply with the most rigorous existing guidelines from the relevant international or sector-specific bodies to make the bonds attractive to local and foreign investors.