With huge infrastructural gap and inadequate finance, Nigeria is faced with the onerous task of stable economic development in pace with its growing population. In this report, OLUSHOLA BELLO writes that the move to launch Africa’s first-ever climate-related bond by Nigeria may open up another vast opportunity to develop major infrastructures.
It is widely recognized that climate change presents one of the greatest challenges of the world today. Its deleterious effect spreads tentacles over developing and developed countries, in particular, making their population and means of livelihood vulnerable.
In the midst of this vulnerability, an opportunity resides for African economies to grow in a manner that is climate resilient, ensure poverty reduction whilst meeting its energy deficiency and one of the innovative means of exploring this opportunity is through the issuance of green bonds, which is fast gaining recognition as means of raising finance for climate friendly purposes.
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.
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, road, electricity and water are intermediate inputs to production, this is because infrastructure services tend to raise productivity of other factors.
The country’s huge infrastructural deficit in power, housing, roads, healthcare, port services among others, have contributed to a large extent in retarding the growth and development of the economy.
Meanwhile, against this backdrop of the comatose state of the economy, governments and stock market operators have agreed that tapping into the green
bond market, which has gained global acceptance will be crucial to climate finance and intensify efforts on infrastructural development to enhance citizens’ standard of living.
Also, experts believed that since the banking sources are unable to meet the growing financing needs in Nigeria’s infrastructure, there is need to bridge the infrastructural gap through the green bond market to achieve the desired growth.
Understanding a green bond
A 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.
Paris pact on bond
The out-gone Minister of Environment, Amina Mohammed, said under the Paris Agreement, developed countries reaffirmed their commitment to mobilise $100 billion of resources by 2020 to support developing countries ‘enhance the implementation of their policies, strategies, regulations and action plans and their climate change actions with respect to both mitigation and adaptation.’
Mohammed, who spoke at the Green Bonds Capital Market and Investors Conference tagged ‘Green Bonds: Investing in Nigeria’s Sustainable Development, at the Nigerian Stock Exchange (NSE) recently, noted that this objective will remain in place to 2025 and will act as a floor from which flows shall increase beyond 2025.
The provision of these resources will be indispensable if Nigeria is to realise its NDC, especially the 45 per cent emissions reduction and the adaptation and resilience building activities.
“The Paris agreement, which was signed by Mr. President enabled us to develop our Nationally Determined Contribution (NDC) and constitute the Inter-Ministerial Committee on Climate Change charged with the responsibility for cross sectoral integration of Climate Change issues into main stream planning and also to identify a pipeline of projects which the Green Bonds will fund.
The delivery of Nigeria’s NDC will require a fundamental re-orientation of financial flows within the economy. “Capital will need to flow toward low-carbon, climate resilient opportunities and away from carbon intensive, polluting activities or those that exacerbate climate vulnerability leading to poverty, insecurity, reduced health quality among other things,” Mohammed said.
Nigeria takes the lead in Africa
In order to key into the initiative, the federal government need to achieve the targets in the NDCs by 2030 are put at around $142 billion, translating to about $10 billion per annum. Nigeria’s confirmed recession and reduction in its main source of income requires creative and directed means to mobilise resources that will fill its funding gap while also ensuring that project implementation achieves the expected outcomes.
While the country will commence the issuance of its first N20 billion sovereign green bond this month, March, 2017 to fund projects to reduce carbon emissions and develop renewable energy in the country.
The out-gone Minister of Environment said the green bond will be the first to be issued in Africa, stressing that issuance of the bond will be the first stage in enabling Nigeria to tap into the growing global market for green bonds.
Mohammed said, “Green Bonds present an opportunity for us to begin to achieve this. The process, which will see Nigeria launch the first Sovereign green bonds in an emerging market, began as a seed, which was sown by the private sector and the Nigerian Stock Exchange. So you can say we have achieved half the circle and will come full circle when we finally issue the bonds this quarter.
“Since we began this journey we have taken a number of steps, which you will hear, later on, to ensure that we are able to sustain a bigger plan for the inflow of additional funds through subsequent issuances thus beginning the process of attempting to green our economy,” she said.
Mohammed said the bond would be aimed at domestic markets and its focus would be on low-emission projects in areas including solar power, agriculture, transport and deforestation. She said the Ministry of Finance through the Debt Management Office (DMO) who are responsible for managing the process have been instrumental to laying solid foundations for this process.
Objectives of bond issue
The Acting President, Professor Yemi Osinbajo, said the bond will be used to fund a range of climate-related initiatives including mass transit, energy and aforestration programme. He said the launch of the first African green bonds is the one that will tap into local and international investors.
Osinbajo noted that it was a crucial achievement for Nigerians’ determined battle against the consequences of climate change, adding that the challenges of climate change has the potential of increasing natural disasters affecting foods and water energy supplies.
The acting president said, “As confronted with these realities in reviewing securities concerns in lake Chad region and parts of northern Nigeria, with the group of experts and government officials.
The drying up of lake Chad has made the destruction of hundreds and thousands of agricultural livelihoods and worsening of poverty in this region and more importantly fueling civil conflicts in the region as fight over available arable land flay up regularly.
“Green bonds means that the proceed will be applied to environment and climate friendly on green projects. We are witnessing an alliance between finance and environment. It is an opportunity to deepen our capital market and make a dent in combating poverty and inequality.
“We are doing 20,000 more homes on solar energy, which will benefit from the green bonds. Another project, which will benefit from the green bond includes renewable energy.
An important feature of the 2017 budget is energising education, it will also benefit from the green bond. Power has posed a major challenge to effective learning in our universities. So, this programme will give access to power to 37 federal universities and seven university teaching hospitals among others.”
Explaining more on the targets of the Green Bond issue, Mohammed noted that the Government’s new proposed Economic Recovery and Growth Plan identifies the Green Bonds as one of the alternative sources of financing.
She said the deal will drive further investment in agriculture, oil and gas and infrastructure development which will in turn grow Small and Medium Enterprises (SMEs), manufacturing and stability of new and old businesses in the areas of job creation and revenue generation for the economy.
The Minister of Power, Works and Housing, Mr. Babatunde Fashola, said that the initiative was based on extensive consultation, saying that the DMO would determine the amount that would be used for all projects earmarked under the Green Bonds.
He said that Nigeria was working toward achieving 30 per cent in renewable energy by 2030, adding that Solar Unit Distribution Programme (SUDIP) project was estimated to cost N1.3 billion.
According to him, the units in aggregate from the project will provide up to 12MW of power, creating 6,000 jobs and impacting at least 60,000 persons.
Calling on investors’ participation
Mohammed called on the domestic capital markets to rally round the issuance.
According to her, our domestic market need to rally around our own domestic issuances. The recently issued Euro Bonds are a testament to us that the Nigerian Market is still viable. So, let’s translate that to domestic issuances. Greening our economy and financial systems will in the long run support our sustainability efforts and improve the economy as it will open new avenues for new types of jobs, innovation and skill.
Stakeholders’ view on green bonds
Following the Federal Government’s aspiration to make the economy green, investors in the Nigerian capital market have lauded its effort to revive the economy with the 2017 sovereign green bonds initiative.
For instance, chief executive officer of the Nigerian Stock Exchange (NSE), Mr. Oscar Onyema said oversubscription in Green Bond issuance is commonplace, meaning that the planned issuance by Nigeria will record significant patronage.
According to him, assets under management by signatories to United Nations-supported Principles for Responsible Investment (Green Investment) rose from $4 trillion in 2006 to $60 trillion in 2015. Besides, he said assets managed by institutional investors in the Organisation for the Economic Cooperation and Development (OECD) countries are projected to hit $120 trillion in 2019.
This, Onyema explained, are signals of a vibrant green bonds market that Nigeria will benefit from.
The chief operating officer of InvestData Limited, Ambrose Omordion, disclosed that the Green Bonds issuance, which will be the first stage in enabling Nigerian tap into the growing global market for green bonds, worth about $576 billion of unlabeled climate-aligned bonds and $118 billion of labeled green bonds as at the end of 2016, represents a new stage in development of Nigerian capital markets and opens the way for further corporate issuance and international investment.
Also, the managing director of Highcap Securities Limited, Mr. David Adnori said, “Stakeholders should play key role to help develop this enormous opportunity for Nigeria and fulfill one of the key objectives of members of the United Nations Sustainable Stock Exchange Initiative.”
According to Adnori, this is the first green bond issuance in an emerging market like ours and it presents an opportunity in the diversification of our economy and it will bring together institutional investors, banking finance and young social entrepreneurs that will ensure this initial bond launch is a success, enabling the development of a green bond market while building our national climate finance capabilities.
In the midst of the current uncertainties in the Nigerian economy and the country’s journey towards vision 2020 is noble, 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.
Meanwhile, the 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 programme over a more attainable time line.
But while bonds are veritable sources of funding needed to bridge Nigeria’s infrastructure deficit, such bonds will only be attractive to investors if the underlying projects are viable, properly developed and satisfy the bankability test. That onus lies on government, professional advisers and other stakeholders to make a success of Africa’s maiden sovereign green bond.