Green Financing in Nigeria

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Aaron Olajide

The first green bond in Nigeria was issued in 2017. Since then, the Nigerian green bond market has continued to gain considerable traction. This year alone, we have seen North South Power Company (“NSP”) Limited, a pan African power generation company, issue its first N8.5billion 15-year 15.6 percent Series 1 Guaranteed Fixed Rate Senior Green Infrastructure Bonds, due 2034; through NSP-SPV PowerCorp Plc—a special purpose vehicle for raising funds from the capital market to finance capital expenditure and optimize the capital structure of NSP. This is the first series of a N50billion senior green infrastructure bond and it was oversubscribed by 60 percent. Even more recently, Access Bank Plc listed its N15billion 5-year 15.5 percent Fixed Rate Senior Unsecured Green Bond, on the FMDQ OTC Securities Exchange and the Nigerian Stock Exchange (NSE), due in 2024.

Defining Green Bonds
A green bond is any type of debt instrument, the proceeds of which would be exclusively applied to finance or re-finance in part or in full, new and/or existing projects that have positive environmental impact, otherwise referred to as green projects.

As a viable alternative to traditional financing mechanisms, green bonds offer easy access to a large and diverse funding pool, providing a source of low-cost and much-needed capital to finance infrastructure projects and set up green funding programs. The cornerstone of a green bond is the utilisation of the proceeds of the bond for green projects, including other related and supporting expenditures.

A person desirous of issuing green bonds in Nigeria is required to comply with the Securities and Exchange Commission’s (“SEC”) Green Bonds Issuance Rules (“the Green Bonds Rules”) together with SEC’s new listing rules, which codify the criteria and approval process of green bonds in Nigeria.

Interestingly, the Green Bonds Rules align with the International Capital Market Association’s Green Bond Principles (“the GBP”). In the main, the GBP are voluntary process guidelines for issuing green bonds. The GBP are intended for use by market participants and are designed to drive the provision of information needed to increase capital allocation to green projects. With a focus on the use of proceeds of green bonds, the GBP recommend transparency, disclosure, and reporting as way of promoting integrity in the green bond market.

Qualifying as Green Projects
As previously mentioned, the distinguishing element in green bonds, is the utilization of its proceeds on green projects.
To qualify as a green project under the Green Bonds Rules, an investment must fall into one or more of the following: renewable and sustainable energy, clean transportation, sustainable water management, climate change adaptation, energy efficiency, sustainable waste management, sustainable land use, biodiversity conservation, green buildings (commercial real estate development) and any other categories as may be approved by SEC from time to time.

Conditions for Approval of Green Bonds by SEC

In addition to the general registration requirements for debt issuances as stated in the Rules and Regulations of SEC for States, Local Governments, Government, Corporate and Supranational agencies, an Issuer of a Green Bond is required to file:

• A letter committing to invest all the proceeds of the bond in projects that qualify as green projects or assets in line with the Green Bonds Rules;

• A feasibility Study and Report stating clearly, the measurable benefits of the proposed green project(s) or asset(s) such as greenhouse gas reduction, reduction of water use and reduction of harmful emissions;

• A prospectus which shall include project categories, project selection criteria, decision-making procedures, environmental benefits, use and management of the proceeds.

• An independent assessment or certification issued by a professional certification authority or person approved or recognized by SEC; and
• Any other documents that may be required by SEC.

UTILIZATION AND MANAGEMENT OF PROCEEDS
Again, the cornerstone of a green bond is the utilization of its proceeds. On this, the Green Bonds Rules provides that:

• The net proceeds shall only be utilized for the purpose stated in the approved offer documents and shall be tracked as stated in the approved internal policy of the Issuer which shall be disclosed in the offer documents.

• An escrow account shall be opened specifically for the net proceeds of the offer.

• The proceeds shall be domiciled with the Custodian and the Trustees shall ensure that the proceeds are used for the purpose stated in the prospectus.

• The Issuer and the Trustees shall be the signatories to the escrow account.

• The Issuer shall invest proceeds in green projects within the given timeframe prescribed in the prospectus.

• Unallocated proceeds shall be invested by the Trustees in money market instruments with investment grade rating that do not include greenhouse gas intensive projects which are inconsistent with the delivery of a low carbon and climate resilient economy.

Issuing Green Bonds in Nigeria
Giving the need for accountability and transparency in the utilization of green bond proceeds, the Green Bonds Rules require the Issuer to provide to SEC and the Stock Exchange (where listed), at least annually, a Green Bond Report containing the list of the project(s) and asset(s) to which proceeds have been allocated for the duration of the bond.

The reporting process and authority must be documented and maintained as part of the Issuer’s Green Bond Framework. Again, the rationale here is that transparency is of particular value in communicating the expected impact of projects.

Accordingly, the Green Bond Report should include a brief description of the project(s) and the amounts disbursed, including (where possible) the percentage of proceeds that have been allocated to different eligible sectors and project types and to financing and refinancing. In any case, where confidentiality agreements or competition considerations limit the amount of details that can be disclosed, the information may be presented in generic terms.

Further, the report should state the expected impact of the project(s) and asset(s), qualitative performance indicators and, where feasible, quantitative performance measures of the impact of the project(s). The report should further state the methodology and underlying assumptions used to prepare performance indicators and metrics shall be disclosed.

There is also a requirement on the Issuer to publish an assessment report issued by an independent professional assessment or certification agency on its website or other media, conduct and report annual follow-up assessments of the green project(s) and associated environmental benefits throughout the tenor of the bond and publish same in its annual report and on its website or other media, a copy of which should be filed with SEC.

REFINANCING EXISTING GREEN ASSETS
It is quite likely that an Issuer intends to apply a portion of the proceeds of the issued green bonds, towards refinancing existing green project(s) or assets. In such a case, the Issuer is required to clearly provide in the offer document, the details of the portfolio or asset(s) or project(s) which are identified for such refinancing, and to the extent relevant, the expected look-back period for refinanced project(s).

CONCLUSION
Whilst the Green Bond market is far from mature, this year does offers some brighter prospects, given the regulatory and participatory momentum.
Olajide is an Associate at Matrix Solicitors LLP: aaronjide@gmail.com