The United Nations Sustainable Stock Exchange Initiative held roundtable discussions on Green Finance as part of the United Nations Conference on Trade and Development (UNCTAD) World Investment Forum in Nairobi on July 20.
A key focus of the discussions was the important role the financial community plays in the global climate agenda. Taking cue from this, bankers are working to develop a Green Bonds (GBs) Market in collaboration with the Nairobi Securities Exchange (NSE). This will see Kenya join Morocco and South Africa in tapping into this nascent bonds market
A GB is a debt instrument that is issued to raise capital in support of environmental and climate related projects. In addition to the standard financial evaluation process of the conventional bonds, investors in the GBs have to assess the specific environmental purpose the bond intends to support.
As per the International Capital Market Association, the four steps to be followed when issuing a GBs are; defining project selection criteria, establish project selection process, earmark and allocate proceeds and finally monitor and report. The GBs market is nascent in global capital markets. In order to issue these bonds, Kenya will have to rely on guidelines issued under the Green Bond Principles (GBP).
The GBP recognises eligible projects as those falling within the following domain: renewable energy, energy efficiency, sustainable waste management, sustainable land use; biodiversity conservation, clean transportation, sustainable water management and climate change adaptation.
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The global Green Bond market recorded remarkable growth in 2015 with issuance hitting $41.8 billion; the biggest ever for green bonds. The annual growth in this market has been remarkable ever since the European Investment Bank (EIB) issued the first GB in 2007; the Euro 600 million climate awareness bond.
Though there has been remarkable growth in the GBs, it commands a small proportion in the global bonds market which was estimated to be in excess of $93 trillion as at end of 2015. This demonstrates that there is potential for the GB market to grow and expand.
Currently four types of GBs are being offered on the global market. The Green Project Bond is a single or multiple projects for which the investor has direct exposure to the risk of the project(s) with or without potential recourse to the issuer. Green Securitised Bond is collateralised by one or more specific projects, including but not limited to covered bonds, asset backed securities and other structures.
A Green Use of Proceeds Revenue Bond is a non-recourse to the issuer debt obligation in which the credit exposure in the bond is to the pledged cash flows of the revenue streams. The use of proceeds in this kind of a green bond goes to related or unrelated green project(s).
The fourth type of bond is the Green Use of Proceeds Bond which is a standard recourse to the issuer debt obligation for which the proceeds shall be credited to a sub-account, moved to a sub-portfolio or otherwise tracked by the issuer. It is attested to by a formal internal process that will be linked to the issuers lending and investment operation for eligible projects.
Benefits to issuers of GBs as compared to conventional bonds in the Kenyan market come two fold. First, the issuers will be able to reach to a new investor group which is valuable to expanding funding sources.
In particular, GBs have attracted investors from a growing segment focused on Sustainable and Responsible Investing (SRI) as well as those that incorporate Environmental, Social and Governance (ESG) as part of their investment analysis.
Secondly, it is a platform for the issuer to raise awareness and open intense dialogue with investors about projects that help address climate change and other environmental challenges. This is key in enabling Kenya transition to low carbon development and climate resilient growth.
