Intensifying Sustainable Finance

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Through the efforts of Nigerian Stock Exchange, the federal government and other corporate bodies have been able to raise over N49 billion green bonds to fund climate projects in the country, writes Goddy Egene

Climate change related issues have emerged the top five risks in the World Economic Forum’s Global Risks Report, a first in the publication’s 14-year.
The report indicated slow rate of mitigation and adaptation to climate change as key concerns for business leaders, non-government organsiations (NGOs), academics and other stakeholders keen on ensuring sustainable use of the planet’s resources.

Recent environmental trends such as ravaging bushfires, extremes of temperatures, floods, cyclones and season disruptions have made the effects of climate change even more real in many countries across the world.
Reversing the trend, therefore, requires active participation from the public and private sectors, particularly in raising the significant amounts of money needed to fund the mitigation and adaptation measures and in the efficient management of natural resources.

And in recognition of this, sustainable finance, broadly encompassing the suite of innovative financial products designed to facilitate and support the financing of green, sustainable and/or ethical projects, businesses and companies, has gained increasing significance in recent years.

Green bonds are fixed income securities that are just like an ordinary bond, but with the caveat that the proceeds be invested in projects that generate environmental benefits. With green bonds, corporate, government sovereign and supranational entities can mobilise resources from domestic and international capital markets for climate change adaptation, renewables and other environment-friendly projects.

Globally, the green bond market has witnessed tremendous growth with a total of $181 billion raised from global investors in 2019, compared with the $13 billion raised in 2013. On the demand side, there has been heightened consideration of Environment, Social and Governance (ESG) factors in the demand for profitable investment products.

While developed markets have made notable advancements in green bond in terms of trade value and volume, the growth of emerging markets is gaining pace. It has been reported that there are now over 1,963 funds that have integrated ESG mandates currently valued at about $857 billion. Furthermore, issuers in the financial, energy and public sectors account for 76 per cent of total issuances so far. These efforts have been closely guided by global frameworks including the United Nations Sustainable Development Goals (SDGs) and the Paris Climate Agreement.

Green Bonds Issuance in Nigeria
Looking at the Nigerian market, the Nigerian Stock Exchange (NSE) has demonstrated unwavering commitment to transforming the Nigerian economy into one that is more environmentally and socially sustainable, offering benefits to issuers, investors and the country at large. In 2016, NSE reached out to the Ministry of Environment with a proposal for the issuance of a green bond which was embraced and championed by then Minister of Environment and now Deputy Secretary General of the United Nations, Mrs. Amina Mohammed.

This move led to a series of partnerships and innovations that have delivered gradual uptake in this market segment. Among these was the first ever green bonds conference themed: Green Bonds: Investing in Nigeria’s Sustainable Development which held in Lagos and was headlined by the Vice President, Prof. Yemi Osinbajo.

Speaking in an interview after the conference, Mohammed had said: “The NSE sowed the seeds of green bonds when they approached me about sustainability principles and the role businesses could play. Nigeria was looking for an instrument that worked with its ‘Intended Nationally Determined Contribution’ and its national strategy to bring jobs and green infrastructure investment and green bonds provided a viable option.
“With green bonds, investors can buy into a new product with new credentials which has gone through a vigorous process to ensure transparency and accountability in the use of funds, and is environmental friendly.”

Through the collaborative efforts of the NSE, the Ministry of Environment and the Debt Management Office (DMO), the 5-year N10.69 billion sovereign and certified green bond – the first of its kind on the African continent – was issued and listed on the floor of the NSE in 2018 to fund renewable energy projects. With a commitment to a 20 per cent to 30 per cent emission reduction by 2030, this move was in line with the need for long-term capital to fulfil Nigeria’s Nationally Determined Contributions (NDCs) put at N142 billion by 2030 following the ratification of the Paris Climate Agreement by the Federal Government of Nigeria in the same year.

Commenting on the listing of the bond on the NSE, President Muhammadu Buhari expressed delight to witness the listing of Nigeria and Africa’s first sovereign green bond on the exchange.
“The listing of the green bond represents fulfilment of a key goal of Programme 47 of the Economic Recovery and Growth Plan (ERGP), the issuance of green bond. The federal government through the Ministry of Environment and the Ministry of Finance is proud to be a champion of this initiative”.

Buhari commended the NSE for conceptualising the idea of green bond saying: “The NSE reached out to the Ministry of Environment in 2016 with a proposal for the issuance of a green bond. The consultation which emerged created a platform for mutual learning for the Ministry and capital market community. Our collective effort has created a product that is not just novel but premier. There is indeed plenty to celebrate even as we work towards another issuance on the back of the recently signed 2018 budget.”

In line with this commitment, the market welcomed a subsequent issuance of a seven-year, N15 billion sovereign green bond in 2018 which was well received by investors with a subscription level of 220 per cent. Since then, there have been other issuances by corporate bodies that have further increased investible instruments and deepened the Nigerian green bond market. In 2019, NSE welcomed North South Power’s 15-year, N8.5 billion green bond, the first green infrastructure in Nigeria and Access Bank’s five -year, N15 billion green bond, first certified corporate green bond in Africa, bringing the total value of listed green bonds on the exchange to N49.19 billion ($136 million).

NSE, LuxSE promotes dual listings
To further reinforce NSE’s drive to foster the growth of sustainable finance in Nigeria, the exchange signed a Memorandum of Understanding with the Luxembourg Stock Exchange (LuxSE) last year at the annual meeting of the World Federation of Exchanges in Singapore. The MoU establishes an agreement for the two exchanges to promote cross listing and trading of green bonds in the two countries, as well as collaborate with a view to sharing best practises and organising joint initiatives in their respective markets.

The LuxSE operates the Luxembourg Green Exchange (LGX), a platform exclusively dedicated to sustainable finance instruments and home to the first ever green bond to enter the market: The European Investment Bank’s “Climate Awareness Bond”. With more than 160 green bonds listed on its market, LGX now holds a 50 per cent global market share of listed green, social and sustainability bonds. LuxSE works closely with select stock exchanges around the world to support the growth of sustainable finance.

Already, Access Bank has made its application to list its green bond on the LGX, a feat made easier by the foresight of the NSE in signing the MoU with LuxSE. If its application to the LuxSE is successful, Access Bank’s green bond will be the first cross listing born out of the partnership between NSE and LuxSE.

Going forward
Consolidating on its efforts to facilitate the uptake of green bonds in the Nigerian capital market, the NSE recently hosted the delegation from the Ministry of Environment led by the Minister Dr. Mohammad Abubakar in Lagos for a Green Bond Advisory Committee Meeting. Deliberations at the meeting centred on the need for increased collaboration between the public and private sectors to fully harness the potential of Green Bonds to address economic, social and environmental issues in Nigeria.

Commenting, Abubakar said: “Ten years ago, there was little or no interest in investing in ‘green.’ Thanks to partnerships with organisations like the NSE, we have made significant progress drawing attention from retail and institutional investors at home and abroad. We are now in the process of issuing the third tranche in the series of Sovereign Green Bonds from the Ministry of Environment and Debt Management Office which will address projects related to clean energy production, smart agriculture, waste management, amongst others.

We are confident that these issuances will lead to a paradigm shift from business as usual and take us closer to achieving a circular economy.”
The NSE has expressed that it is resolute in its commitment to the development of a sustainable capital market in Nigeria evidenced by its ongoing membership in organisations such as the Sustainable Stock Exchanges Initiative (SSEI).

In his statement at the recently held sixth meeting of the Green Bond Advisory Group, the Chief Executive Officer, NSE, Mr. Oscar Onyema, said: “We will continue to maintain a dedicated sustainable market segment which provides issuers, asset managers and investors, access to green, social, sustainable, or ESG-focused securities.

“Asides green bonds, this segment will also promote the development of green labelled Fixed Income Products, Indices and Exchange Traded Products (ETFs) that help direct funding of green projects and environmentally aligned issuers as well as the green transition that ensures market resilience to the economic impacts of climate change.”

The NSE also continues to support capacity development and investor awareness through the NSE X-Academy, a specialised learning centre that offers bespoke capital market and business courses including courses across the Sustainable Finance theme. In its 2020 Training Calendar, the X-Academy has included a course on Green Bond Reporting Framework which is a post-issuance obligation under a GBP aligned issuance framework.

Market stakeholders believed that green bonds will continue to play a critical role in the development of the Nigerian economy.

And to further enhance the vibrancy of the market, the stakeholders have called on government to encourage the participation of the pension sector currently valued at N9.58 trillion with only 0.14 per cent invested in green bonds. Looking at larger pension funds such as Japan’s Government Pension Investment Fund (GPIF), the world’s largest retirement scheme with ¥159 trillion ($1.5 trillion) in assets, ¥3.5 trillion ($32.2 billion) of its portfolio is allocated across five ESG benchmarks. And the NSE has said it would continue to facilitate these discussions and promote the expansion of sustainable asset class in Nigeria.