Africa has slid down investors’ lists of favoured investment destinations as a result of the fall in oil and commodity prices of the last three years and the well-known problems of South Africa and Nigeria, the continent’s two largest economies.
However, in one fast growing but still undersized section of international capital markets there could be room for African countries to play a leading role. The new frontier for Africa may be the issuance of ‘green bonds’ to finance environmentally friendly projects under a range of initiatives by governments, banks and international development agencies.
A panel on green bond issuance, with around 100 participants, was one of the best-attended sessions at last week’s African capital markets conference in Nairobi organised by the International Finance Corporation, the private sector scion of the World Bank. It featured presentations from Barclays, Citibank, the Kenyan Bankers Association and the London Stock Exchange. As one speaker said, three or four years ago only a handful of delegates would have taken part.
Kenya, the host for the IFC conference (where OMFIF was one of the partner organisations), is considering launching a green bond after elections in August, intended to highlight the country’s advances in improving energy self-sufficiency and reducing carbon emissions. The progress is partly due to investments in geothermal energy projects financed by China. A range of African countries which have seen their bonds downgraded as a result of recent economic misfortunes, including Angola and Nigeria, are also candidates for such issuance.
One of the impediments for such schemes – and to the development of African capital markets as whole – is the continent’s low economic weight and high fragmentation. On the other hand, most African economies are growing at well above the world average, and risk-orientated investors can normally find channels for their funds yielding rewards that more than match actual risk.
Jingdong Hua, the IFC’s treasurer, points to $40tn of fixed income placements in industrialised economies in low or negative interest instruments. He urges investment groups and pension funds to become more adventurous in funnelling capital to developing economies. Hua propounded in Nairobi the idea of the IFC launching ‘diaspora’ bonds to absorb savings held abroad by wealthy Africans, a bid to encourage repatriation of sometimes illicit offshore holdings.
The IFC is in the forefront of what Hua calls ‘smart use of [public sector] balance sheets’ to combine funds from multilateral agencies and donor governments with innovative private sector financing for Africa, Latin America and Asia. This is part of the ‘joined-up thinking’ gradually taking hold among governments providing development aid. This will allow taxpayers’ money in many countries to stretch further into boosting beneficial investment in ventures ranging from ports, highways and railroads through to energy, telecommunications and education.
The IFC is placing $325m in a green bond fund for developing markets, in a move announced in March. It has partnered with Amundi, the European asset manager, to raise up to $2bn from other international investors to create the biggest-yet green bond fund for emerging markets. Other groups such as the European Investment Bank and KfW, the German state financing agency, are both issuers of and investors in green bonds.
The worldwide green bond market totals less than $1tn, a miniscule part of the overall fixed income sector of around $100tn. But issuance has increased, owing to worldwide accord on anti-climate change measures in Paris in December 2015, adroit marketing by investment management groups, and demand for environmental instruments from governments and investors around the world.
Poland launched the first sovereign green bond in December. This was followed by a €7bn French green bond in January. Issuance this year is forecast at $110bn-$120bn, above the record $93bn in 2016. Because demand outstrips supply, green bonds appear to be performing better than standard bonds in the aftermarket, although the scarcity of longer-term data makes it impossible to discern whether this is a durable trend.
One of the drawbacks is lack of international standardisation of what constitutes a green bond. There is no worldwide monitoring mechanism to ensure compliance with the parameters set by frameworks such as the Green Bonds Principles or Climate Bonds Standards, adding to market fragmentation. To improve certification procedures, the Bank of England and People’s Bank of China are collaborating under an initiative spurred by the G20 leading economies.
As emerging market green bonds attain greater scale, one area of demand will be Nordic pension funds and public sector agencies. Norway’s sovereign fund – usually classified as the world’s largest, and a leader in environmental investments – has investments in 77 countries and 50 currencies. At end-2016 this encompassed 30 frontier markets, including Botswana, Ghana, Kenya, Mauritius, Morocco, Nigeria, Tanzania and Uganda – all candidates in coming years for launching African green bonds.
David Marsh is Managing Director of OMFIF.