Green security and shoots of investment? Africa’s Green Bond Market (Part 1)

December 2024

Antony Smith, Savita McRae and Kayleigh Rhodes

In our latest Global Vantage update, we turn our attention to Africa’s Green Bond Market. In Part 1 we delve into green bonds and their use by nations in the region. In Part 2, we will consider the potential challenges to the wider acceptance and use of green bonds.

What are green bonds?

Green bonds are similar to traditional bonds, but the capital raised is specifically put towards projects that have positive environmental or climate benefits.[1] To action this, these bonds require a ‘use of proceeds’ clause to ensure the funds are directed towards projects that meet certain criteria. Green bonds can be issued by governments, corporations, municipalities and international organisations. These bonds are appealing to investors because they are impact-driven and can contribute towards investor’s commitments to investing in ESG initiatives. By way of wider context, there is also an increasing awareness and appetite around ESG-related matters and environmental action globally. In 2023, the global market for green bonds surpassed $600 billion USD.[2]

International Actors

There are various international organisations that are advocating for green bonds, but two notable institutions include the International Capital Market Association and the Climate Bonds Initiative. The former has published its ‘Green Bond Principles’ which outline the best practices when issuing these types of bonds. These main principles are:

use of proceeds;
process for project evaluation and selection;
management of proceeds; and
reporting.

The Climate Bonds Initiative has published the ‘Climate Bonds Standard and Certification Scheme’ which is a voluntary scheme that certifies debt instruments meet the Climate Bonds Standard.[3]

Africa’s Commitments, Frameworks and Successes

Nearly all African countries have submitted their Nationally Determined Contributions under the Paris Agreement. It is estimated that Africa needs $2.8 trillion USD by 2030 to achieve these contributions.[4] While this figure may seem daunting, there is investor appetite if sufficient regulations are in place. For example, Cape Town municipality’s green bond for a reported $83 million USD was transparent, verified and accredited.[5] As a result, it was oversubscribed by 4.3 times and only required 2 hours and 29 investors to make the necessary offers.[6] Another recent successful example is the Côte d’Ivoire Sustainability Bond for $1.1 billion USD.[7]

There is still the need for significant regulation and legislation surrounding the use and application of green bonds across the continent however, several nations have started this process which has facilitated investment.

Nations such as South Africa, Morocco, Kenya and Nigeria are at the forefront of the African green bond market in both their funds received and their current frameworks.[8][9] With other nations such as Zambia, Ghana, and Egypt making headway with their own frameworks and guidelines for green bonds.[10][11][12]

Amongst other multilateral development banks, the African Development Bank (AfDB) is a consistent major player within the African green bond market. In 2019, the AfDB raised $41 million USD for afforestation and renewable energy projects in Nigeria.[13] In 2023 they signed a joint partnership with the Global Green Bond Initiative to help promote green bonds across Africa.[14]

Our research indicates that a number of nations / municipalities are using green bonds. This may be important when considering the terms and/or negotiating the leverage of the bond, as well as when considering any connected contracts linked to the project and its specific funding criterion or requirements.

Conclusion

Overall, green bonds represent a significant step towards African nations achieving their Nationally Determined Contributions and bridging the climate financing gap. Interested stakeholders or those working on projects in region with an environmental, social or governance (ESG) focus will no doubt be interested in the emergence of funds which might be available. There is also opportunity to be found in the African green bond market, but it is necessary for nations to establish frameworks and guidelines to quell investor’s concerns (as we will explore further in our next update).

For more information on legal matters on international construction and engineering, please contact Antony Smith.

[1] Easing Africa’s climate crisis: Can green bonds help close the climate finance gap? – Africa Policy Research Institute (APRI)

[2] Developing Africa’s Green Bond Market: Unlocking Investment and Economic Growth – ALN

[3] Easing Africa’s climate crisis: Can green bonds help close the climate finance gap? – Africa Policy Research Institute (APRI)

[4] Ibid.

[5] Green bond of the Year – Local authority: City of Cape Town :: Environmental Finance

[6] Developing the green bond market in Africa

[7] Easing Africa’s climate crisis: Can green bonds help close the climate finance gap? – Africa Policy Research Institute (APRI)

[8] Developing the green bond market in Africa

[9] Transforming finance for Climate Resilience in Kenya: Innovating with Resilience Bonds and related financing mechanisms | Green Climate Fund

[10] ESG and impact investing—Zambia—Q&A guide

[11] Green bonds bloom in Africa