A KEENER LOOK INTO GREEN BONDS

 

On 17^th March insiders at Kenya Commercial Bank (KCB) while speaking to journalists revealed that the bank is seriously considering floating a green bond of an upwards of sh114 billion. KCB, which recently announced a record shattering profit of sh34.2 billion for the year ending December 31, 2021 was in 2020 accredited by the United Nations’ Green Climate Fund (GCF) as the first lender in the country to support climate mitigation and adaption projects through green financing.

Though still at the beginning of the acceleration phase, green bonds are on track to become a global craze. According to the Climate Bonds Market Intelligence (CBMI), the global green bonds market has exhibited a stellar growth of about 50% in the past five years. In 2020 alone, about $532 billion dollars was raised globally via green bonds- a year on year jump of about 87%. Results of a climate bonds survey carried out in October of 2021 by CBMI indicates that investors expect that global investment in green bonds could hit USD1 trillion in a single year for the first time by the end of 2022. But what exactly are green bonds?

Green bonds are conventionally defined as fixed income financial instruments which are exclusively issued to finance projects that have a positive environmental impact such as renewable energy and green buildings. According to the World Economic Forum (WEF) the first green bond was issued in 2007 by the European Investment Bank, followed by the World Bank a year later. According to research by Statista, in 2021, JP Morgan was the top lead manager worldwide for issuance of green bonds, managing issuance of green bonds worth over a staggering 35 billion dollars, closely followed by Citigroup with green bonds of an upwards of 28 billion US dollars.

            What are the drivers of the uptick of green bonds?

In a 2021 article titled “What are green bonds and why is this market growing so fast?”, Patrick Henry fingered the strong demand for green bonds and political resolve especially in the EU as the key factors that have led to the proliferation of the global green bonds market.

Denise Odaro – Head of Investor Relations at the International Finance Corporation (IFC ) – the World Bank’s Institution focused on the private sector- posits that because green bonds give investors an opportunity to engage in good practices and a means to hedge against climatic change risks while achieving at least similar, if not better, returns on their investments green bonds have inadvertently discouraged high carbon emitting projects.

Additionally, the ramped up global campaigns on the dangers of climatic change have heightened awareness and led corporations around the world to turn to cleaner sources of energy,  cut emissions and take up environmentally friendly and sustainable projects which can easily be funded by green bonds.

According to an article by Harshane Kahagalle and Anna Lindeman-Jones on Addisons, investors in green bonds are in pole position to satisfy ESG goals for sustainable investment mandates contribute to national climatic adaptation, enable direct investment in the greening of ‘brown’ sectors and increase transparency and accountability on the use and management of proceeds becoming an additional risk management tool. Issuers on the other hand are able to improve investor diversification, enhance their reputation, attract strong investor demand which can lead to high oversubscription and pricing benefits and the realization of an additional source of sustainable financing.

On the flip side however, because of the fungibility of money, there is always the risk that issuers may use the amount raised from the green bonds to finance other activities other than the ones earlier indicated when floating the bond. Additionally, under-developed financial markets may not be fertile ground for green bonds; consequently, there aren’t proper rating guidelines for such types of bonds. Moreover, green bonds may fail to offer the much needed liquidity that some investors want at times.   

            Spotlight on the green bonds market in Africa

While global investment in green bonds is expected to hit the trillion mark by the end of 2022, the African market contributes only 0.04% of this amount according to Enright- a former partner at Fintech-focused venture capital firm GOODsoil. This is despite the fact that, due to the continent’s susceptibility to climatic change, it desperately needs to raise at least $50 billion annually to address climate adaptation in agriculture, energy and infrastructure.  

In Kenya, if KCB successfully manages to float its maiden green bond, that will only be the second green bond in the Kenyan market, after the one  by Acorn Holdings in October 2019 which raised sh4.3 billion.

In an article for AFDB’s Africa Economic Brief titled “Why Africa needs green bonds”, Uche Duru and Anthony Nyong advice that institutions like the AFDB with experience in International development on the continent and in green bonds should play a fundamental role in enabling potential players in building the required capacity and sustainable structures for the rolling out of green bonds.