Africa continues to lay the groundwork for climate action

AFMI countries progress in incorporating ESG measures into their market infrastructure

African economies may not need to share responsibility for climate change, but they are working to mobilise investment in this area. This is one key story emerging from OMFIF’s 2023 Absa Africa Financial Markets Index, launching on 12 October.

The seventh annual edition of this report evaluates the financial development of 28 African economies based on pillars such as market accessibility, openness and transparency – including the development of sustainable financial market frameworks. The research is based on surveys of over 50 central banks, securities exchanges, regulators and market participants in Africa.

‘Africa accounts for just 4% of global emissions. Yet it suffers some of the worst effects of rising global temperatures,’ said United Nations Secretary-General António Guterres at the African Climate Summit held in September. Policy-makers are trying to mitigate this and build resilience by incorporating sustainability into financial market frameworks or regulation. This can also unlock new sources of financing at a time when many African countries are locked out of international capital markets.

One common starting point has been publishing guidelines for green or sustainable bonds on domestic exchanges. This ensures transparency and compliance for environmental, social and governance asset issuance.

Among this year’s AFMI countries, Mauritius, Nigeria, Zambia and Morocco already have guidelines for issuing green assets, while South Africa published its first green finance taxonomy in March 2022. For Tanzania and Uganda, their issuance guidelines are in progress, while the Zimbabwe Stock Exchange published a draft version of its green and social bonds principles.

In terms of other sustainable bonds, Banco de Cabo Verde published guidelines for blue bonds issuance in October 2022, therefore, issuing its first blue bond in January 2023. Meanwhile, the Moroccan Capital Market Authority released gender bond guidelines in 2021 – the first gender-specific guidelines among emerging markets. Following this, Banque Centrale Populaire issued the Africa’s first gender bond in Morocco in the same year.

Overall, 71% of the 28 AFMI countries have published market standards for ESG assets, up from 57% of the 23 considered in the 2021 report. So far though, only nine countries have sustainable assets issued, suggesting there is still scope for improvement.

Institutions may need to introduce specific measures for incentivising the issuance of sustainable financial products. For example, in July 2023, the Botswana Stock Exchange approved a 25% discount on initial listing fees for sustainable bonds, which follows a similar measure by the Bourse de Tunis on a tax exemption on interest for green or ESG bonds.

Encouragingly, there have also been several new innovations for ESG asset issuance. Barloworld issued Africa’s first gender-linked bond on the Johannesburg Stock Exchange in August 2022, with coupon rates linked to gender diversity in leadership and growing the proportion of black women-owned businesses in their supply chain. Similarly, Tanzania’s NMB Bank listed Sub-Saharan Africa’s first gender bond last year. Furthermore, the World Bank also approved the first sustainability-linked bond for Rwanda, which will be issued by the Development Bank of Rwanda.

Elsewhere, Nairobi-based CYNK, the first African offsets platform, traded 2m credits in its first transaction. The credits will be produced by Tamuwa, Kenya’s largest biomass company. Meanwhile, Zimbabwe and Namibia have formally launched carbon credits frameworks this year.

Financial regulation is another area of growing focus. Climate stress testing is becoming increasingly important in policy-makers’ assessments of their financial systems’ resilience to these risks. The Central Bank of Kenya, Bank of Mauritius and Reserve Bank of Zimbabwe have issued climate risk management guidelines requiring banks to conduct and report scenario analysis for climate change.

The Central Bank of Egypt and Bank Al-Maghrib carry out climate stress test exercises on the impact of physical and transition climate risks on their banks. Additionally, the South African Reserve Bank added climate change to its common scenario stress tests in 2021 and will include climate factors in insurers’ stress tests and systemically important banks in the next year.

Despite recent unfavourable headlines surrounding African economies, there are signs of progress, particularly in incorporating ESG factors into the market infrastructure. The seventh edition of the Absa Africa Financial Markets Index seeks to reveal how this impacts the scores of the 28 index countries and their overall performance.

Katerina Liu is Research Analyst at OMFIF.

To find out more about the Absa-Africa Financial Markets Index Launch 2023, click here.

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