This article seeks to highlight green bonds as a funding source and will be published in two parts: Part 1 which will explain what a green bond is, the various types of green bonds as well as highlight opportunities and challenges inherent in green bonds for a developing economy like Nigeria; and Part 2 which will discuss the international as well as local regulatory frameworks for the issuance of green bonds and documents required for same.
The stage was set for the issuance of green bonds in 2007 by the European Investment Bank through its Climate Awareness Bond issue. Sequel to this, the label “green bonds” was appended to this type of fixed income instrument by the World Bank. To date, various entities ranging from multilaterals such as the African Development Bank and the International Finance Corporation to state governments as well as public and private companies have issued green bonds.
A remarkable example is the recent issuance of US$1.5 billion in green bonds by the Apple Corporation, for the purpose of financing clean energy projects across its global business operations. It is stated that this issuance mirrors a growing corporate concern about the economic impact of climate change and corporate effort towards mitigating same.
What is a green bond?
A green bond is a “plain vanilla” fixed income instrument issued for the exclusive purpose of financing projects that have positive environmental or climate benefits. The typical features of normal bonds apply to green bonds as their tenors, structures and currencies are based on investor demands. Most importantly, a transparent process is required by investors to ensure that the finance raised is connected to specific projects and the expected positive impacts can be evaluated. Green bonds may be issued privately or publicly by government and corporate entities.
Types of green bonds
Although, four main types of green bonds have been identified based on whether they are issued on a full recourse, non-recourse or limited recourse basis, it is noteworthy that the classification is not closed as the green bonds market is evolving. The major types are as follows:
- Green Use of Proceeds Bonds
These bonds are issued for funding eligible green projects with the investors having recourse to the issuer. The proceeds are kept in a sub-portfolio and monitored by the issuer.
- Green Use of Proceeds Revenue Bonds
Rather than provide recourse to the issuer, this type of bonds are secured by the pledged cash flow or revenue streams of the issuer. The proceeds of the bond issuance may be used for related/unrelated green projects.
- Green ProjectBond
Green Project Bonds are issued for funding a specific single/multiple projects with recourse to the project asset. Thus, the investor has direct exposure to the risk of the project(s) with or without recourse to the issuer.
- Green Securitized Bonds
These bonds are secured by the project(s) and the initial source of repayment is the cash flow from assets.
Opportunities and Challenges
The kernel of green bond issuance is the medium it provides to finance the global shift to low-carbon and climate-resilient development and growth, thereby attracting investors inclined towards incorporating environmental, social and governance factors into their investment portfolio. These potential investors include international financiers such as pension funds, asset managers and sovereign wealth funds which have a large asset base.
The opportunity provided by the issuance of green bonds may be exploited by the players in the Nigerian power sector, which reportedly suffers a USD40billion deficit. This deficit coupled with the increasing energy demand to support and drive the growth of industries in Nigeria should foster the need to harness the huge potential of green bonds to fund renewable energy projects such as through hydro, solar, wind, and geothermal power. The Central Bank of Nigeria also encourages investment by local financial institutions in environmental friendly investments through its 2012 circular on the “Implementation of Sustainable Banking Principles by Banks, Discount Houses and Development Finance Institutions in Nigeria”.
The issuance of green bonds by the federal and state governments as well as public and private companies in Nigeria will address the power deficit by providing finance required for investing in the renewable energy projects.
In view of its evolving nature, the green bond market faces challenges such as the lack of global agreement on what is “green”, the need to / rigorous process involved in monitoring the use of the bond proceeds to ensure its utilization for the intended green purpose as well as the need for standardisation on the governing principles of green bonds.
The African green bonds market is growing and its players include multilaterals like the African Development Bank and the International Finance Corporation as well as some South African Banks. It is noteworthy that the City of Johannesburg, South Africa, recently executed a US$140 million green bond issuance for financing its climate change mitigation strategy.
In the midst of the current uncertainties in the Nigerian economy, the issuance of green bonds by various levels of the Nigerian government or corporate entities will serve as a boost of the country’s economic deficit for infrastructural development and enhance its reputation for commitment to the environment, thereby making it attractive for both local and international financiers.
The local and international rules for the issuance of green bonds as well as the documents required for its issuance will be discussed in the next edition of this publication.