The rapid growth of Africa’s cities underlines the importance of addressing existing solid waste management and pollution problems, providing a reliable water supply, improving public transportation, and resolving infrastructural inadequacies. Finding solutions is vital, but most African governments face tight fiscal constraints.
The global need for finance for sustainable solutions has resulted in the development of innovative financing tools like green bonds. Bonds are loans that enable corporate entities or governments raise funds from investors. Green bonds must be utilised to address environmental degradation and the effects of climate change, and their associated social impacts. Most green bonds are issued to finance the generation of renewable energy, the reduction of greenhouse gas emissions through effective public transport systems, the treatment of wastewater, and effective means of solid waste management. Green bonds enable the private sector to significantly and directly contribute to a country’s long-term environmental conservation and sustainable economic growth goals by providing the needed finance.
The global context
Against the backdrop of the Sustainable Development Goals (SDGs), the global investment climate is progressively demanding not only accountability and transparency, but also the use of the financing proceeds in projects that are environmentally sustainable and socially responsive. These global investors, who consist of pooled funds from pension funds, banks, insurance firms, sovereign funds, high-net-worth individuals, and development finance institutions, have significantly grown their appetite for sustainable investments. Plus, African cities have a huge impact on markets hence it is in the interest of investors to effectively address their development needs. This also explains the worldwide interest in monitoring of the performance of businesses in terms of social and environmental responsibility by investors.
The first green bonds on the continent: South Africa and Nigeria
South Africa was the first African country to successfully issue listed green bonds from private investors. The ZAR 1.46 billion and ZAR 1 billion green bonds were issued by the City of Johannesburg in 2014 and City of Cape Town in 2017. The City of Cape Town used the bond proceeds for projects in electric buses, energy-efficient buildings, water management alternatives, sewerage effluent treatment, and the rehabilitation and protection of coastal structures. The City of Johannesburg used the proceeds for climate change mitigation and low carbon infrastructure projects, among others. The bonds gave the cities access to funds that were not available from public coffers and enabled them to tackle crucial urban sustainability challenges. In 2017, Nigeria issued a US$ 2 million sovereign green bond, the first African state-issued green bond.
How green bonds encourage better governance
The global Green Bond Principles, which were launched in 2014 and updated in 2017, are an industry-led initiative convened by the International Capital Market Association (ICMA). They recommend transparency and disclosure and promote integrity in the development of the green bond market. They require annual reports detailing the projects and assets that have utilised the proceeds of the bond, and the expected green impacts of these projects. The disclosures are externally reviewed against the Climate Bonds Standards, which offer an effective certification scheme with clear, objective, sector-specific climate eligibility criteria for projects and assets. These disclosures are key in enabling the investors to effectively evaluate the green performance of the bond and avoid greenwashing.
These requirements – alongside the basic need for investor trust and confidence – call for governance and legal systems that guarantee accountability and effective management of public funds in cities issuing or intending to issue green bonds. The requirement to list the bond at a securities exchange also means that the bond is subjected to further public disclosures and that the country must have working capital markets. The successful issuance of a green bond is thus a strong testament of the feasibility of the city’s proposed environmental and social projects, and its effective financial management, accountability systems and leadership. It also indicates that the city has addressed the mismanagement, corruption and poor planning concerns currently bedeviling an alarming majority of African cities.
The challenge to leaders
Clearly, the financing deficit in African cities can be addressed through green bonds, but without effective governance, African cities will not be able to issue green bonds. African countries must put in place effective mechanisms that support and facilitate the issuance of green bonds in their local markets, either by private entities or by public bodies. African leaders must address peace and stability concerns, myopic urban planning practices, and the endemic corruption and misuse of public resources. Facilitation can then be accomplished through support of the global green bonds standards and principles, and adoption of national green bonds standards and regulations.
Effective and virtuous leadership can open up access to private capital for sustainable urban development and climate change mitigation for urban populations. This should at the very least rekindle the fight for accountable, futuristic and issue-based African leadership.
(Kenya & UCT, 2017)
Meshack is an Associate at IKM advocates, the DLA Piper Africa member firm in Nairobi, Kenya. His work entails advising on mergers and acquisitions, private equity and venture capital transactions, and competition law in Kenya. Mboya comes from Kithumula village in Kitui County, Kenya and is passionate about sustainable and responsible investments.