Last month, Kenya’s Capital Markets Authority launched the legal framework for green bond issuance in the country, paving the way for Kenyan and international financial institutions to issue green bond on the Nairobi Stock Exchange. This comes as the instrument gains popularity in Africa, driven by entities like the African Development Bank (AfDB) with $500 million issuance in October 2013, the Industrial Development Corporation of South Africa with a $700 million issuance a year earlier and Nedbank with a $490 million issuance. The global green bonds market is expected to reach $1 trillion by 2020.
“Green bonds will increase the financing available for green projects in Kenya, as well as East Africa, and help the region gradually address its vulnerability to environmental risks, which will reduce event risk for banks,” said Christos Theofilou, Vice President – Senior Analyst at Moody’s. “Green bonds will also help banks grow and diversify their lending and funding profiles.”
Moody’s notes that Agriculture employs more than 40 percent of Kenya’s total population, with rain-fed agriculture comprising 37 percent of the economy’s gross value added in 2017. The country has a high dependence on hydropower for around 35 percent of its power. This is in a country vulnerable to environmental risks, including drought.
“Banks’ asset quality is in turn negatively affected by the knock-on effects on borrowers’ loan repayment capacity in the agricultural sector and power-intensive industries like manufacturing, as well as on consumer lending because of lower disposable incomes. Increased green financing will gradually help to address this event risk for banks,” Theofilou added.
Green bonds generate financing for projects in renewable energy, sustainable housing and other eco-friendly industries, tapping the vast pools of financing—the trillions of dollars held by institutional investors such as pension funds, insurance companies, and sovereign wealth funds—available in global capital markets.
Already, Kenya’s Electricity Generating Company, KenGen is considering the issuance of a green bond as part of its push to diversify Kenya’s energy sources away from hydropower at a time of”declining hydrology”.
Withe increased green financing, new environmentally friendly projects are expected to spring up for banks to finance, creating opportunities for them to grow and diversify their loan books.
Kenya is the third sub-Saharan African (SSA) country to have guidelines for green bond issuance after South Africa and Nigeria.
The City of Cape Town issued in June 2017 a $74 million 10-year note maturing in 2027, with proceeds dedicated to refinancing and financing water, sanitation and transportation projects to mitigate and adapt to climate change; and Nigeria in December 2017 issued a $29.7 million green bond with proceeds earmarked for renewable energy and afforestation projects. Moody’s assessed both bonds GB1, or excellent. Also in Nigeria, power utility firm North South Power Company Limited issued its first N8.5 billion ($23.5 million) 15-year 15.60 percent Series 1 Guaranteed Fixed Rate Senior Green Infrastructure Bonds due 2034 under a N50 billion Debt Issuance Programme.
“Five years ago, supranational development banks dominated the global green bond market, but issuers are now increasingly diverse,” Theofilou noted.
The Moody’s VP noted that financial corporates led the market in 2018 and issuance by sovereign-related entities, like various water authorities, has also increased.
“We expect a similar pattern to emerge in SSA, with multinational development banks early green bond issuers. We also expect financial institutions’ green issuance to increase, with proceeds potentially being used to finance long-term environmentally friendly projects in both Kenya and East Africa. Sovereigns and sovereign-related issuers are likely to leverage investor interest to advance their environmental policies,” Theofilou added.