New bond is­sue set to help Africa go ‘green’

A way of bankrolling a clean energy revo­lu­tion

Africa Renewal - - CONTENTS - By Jo­ce­lyne Sam­bira

Johannesburg, or Jozi, as it is af­fec­tion­ately known, is the largest com­mer­cial hub on the con­ti­nent, at­tract­ing mil­lions of visi­tors each year, in­clud­ing stu­dents, artists and busi­ness lead­ers. Its pop­u­la­tion of about 4.8 mil­lion peo­ple is pro­jected to grow to 6.5 mil­lion by 2040, ac­cord­ing to the World Pop­u­la­tion Re­view.

Faced with this record growth and its fore­see­able im­pact on the city’s ag­ing in­fra­struc­ture and so­cial ser­vices, Johannesburg’s Ex­ec­u­tive Mayor Parks Tau gave a nod to a greener path for de­vel­op­ment in his 6 May 2015 State of the City ad­dress. Among the promised in­no­va­tions he listed were low-flush toi­lets and wa­ter-sav­ing uri­nals to be­come a stan­dard fea­ture in Johannesburg homes, of­fices and com­mer­cial sites, al­le­vi­at­ing the pres­sure on the city’s scarce wa­ter re­serves.

Or­ganic waste is to be har­vested for fuel and energy, and so­lar heaters and smart me­tres in­stalled to re­duce the con­sump­tion of elec­tric­ity. Fur­ther­more, to lower pol­lu­tion, he hopes to re­duce the com­muters’ re­liance on pri­vate ve­hi­cles in favour of walk­ing and bik­ing. The mayor also promised to im­prove the public trans­port sys­tem and switch to diesel fuel to lower the city’s car­bon foot­print.

To fi­nance these ini­tia­tives, the city auc­tioned its first ever “green bond” on the Johannesburg Stock Ex­change (JSE) last June. The bond, which is worth $143 mil­lion and is ex­pected to ma­ture in 2024, was 150% over­sub­scribed – a suc­cess! In a speech de­liv­ered shortly af­ter the list­ing of the bond, Mayor Tau said it was a clear demon­stra­tion of “in­vestor con­fi­dence in the City of Johannesburg and com­mit­ment to en­vi­ron­men­tal stew­ard­ship and cli­mate change.”

A bond is a type of loan or an IOU which com­pa­nies, gov­ern­ments or banks use to fi­nance projects. The is­suer is obliged to pay back the debt within a time agreed and with a cer­tain in­ter­est. What war­rants the “green” la­bel is that the pro­ceeds are al­lo­cated to cli­mate and en­vi­ron­ment-friendly projects. By is­su­ing this type of bond, Johannesburg be­came not only a pi­o­neer in Africa, but also within the C40 Cities Cli­mate Lead­er­ship Group, a net­work of megac­i­ties shar­ing best prac­tices and fea­si­ble so­lu­tions to chang­ing weather pat­terns.

Green bond al­lure

Green bonds are not dif­fer­ent from con­ven­tional bonds in their pric­ing. Much of their al­lure lies in the fact that in­vestors feel they are be­ing “so­cially re­spon­si­ble” and that they are hav­ing a pos­i­tive im­pact on the en­vi­ron­ment. Ac­cord­ing to the World Bank’s se­nior sus­tain­abil­ity ad­vi­sor, Laura Tlaiye, in­vestors are in­creas­ingly rec­og­niz­ing the threats en­vi­ron­men­tal degra­da­tion and cli­mate change can cre­ate for long-term fi­nan­cial value, and are con­sid­er­ing it when they choose their in­vest­ments.

At the same time, in­vestors are also drawn to these fixed-in­come green loans that prom­ise reg­u­lar re­turns and a full re­fund of the prin­ci­pal amount once the bond has ma­tured. And in the case of the World Bank, one of the largest fi­nanciers for cli­mate-smart projects in de­vel­op­ing coun­tries, their bonds bring triple “A” rat­ings, in­di­cat­ing they are ex­tremely safe and low-risk. But as the mar­ket ex­pands, so does the need for more clar­ity on how the cap­i­tal raised is used. In­ter­na­tional in­sti­tu­tions pro­vid­ing de­vel­op­ment fi­nanc­ing, like the Euro­pean In­vest­ment Bank ( EIB), were the first to en­ter the green bond mar­ket in 2007. A year later, the World Bank joined forces with the Swedish fi­nan­cial group, Skan­di­naviska En­skilda Banken AB (SEB), to re­spond to a de­mand by Scan­di­na­vian pen­sion funds look­ing to in­vest in en­vi­ron­men­tally friendly fixed-in­come prod­ucts. Since then, the World Bank has con­tin­ued to raise a lot cap­i­tal for projects that seek to mit­i­gate cli­mate change in de­vel­op­ing coun­tries or seek to help af­fected peo­ple adapt to it.

So far, Tu­nisia has re­ceived a loan of over $30 mil­lion to pro­mote bet­ter wa­ter man­age­ment by us­ing the coun­try’s ir­ri­ga­tion and drink­ing wa­ter more ef­fi­ciently, while Morocco has suc­cess­ful ap­plied for funds to build North Africa’s big­gest so­lar power plant in an ef­fort to curb its re­liance on coal and other fos­sil fu­els. To date, the bank has is­sued the equiv­a­lent of $8 bil­lion in green bonds through more than 90 trans­ac­tions in 18 cur­ren­cies.

So­cially re­spon­si­ble in­vestors

Cli­mate change is presently one of the great­est chal­lenges con­fronting the de­vel­oped and the de­vel­op­ing world, warns the African De­vel­op­ment Bank (AfDB), which set up a green bond pro­gramme in 2013. With­out a con­certed ef­fort to re­duce green­house gas emis­sions, echoes the In­ter­na­tional Fi­nance Cor­po­ra­tion, an af­fil­i­ate of the World Bank, the earth’s tem­per­a­tures could rise con­sid­er­ably

within this cen­tury. In or­der to keep global tem­per­a­tures be­low 2 de­grees Cel­sius as agreed by ne­go­tia­tors dur­ing the United Na­tions Frame­work Con­ven­tion on Cli­mate Change ( UNFCC) ne­go­ti­a­tions.

Busi­ness editor and au­thor Mark Gun­ther, in the Yale En­vi­ron­ment 360 online mag­a­zine, ques­tions whether green bonds could “bankroll a clean energy revo­lu­tion” and is un­cer­tain where the money would come from. In a sense, he ar­gues, green bonds are the latest ex­am­ple of “themed bonds for a spe­cific pur­pose ” point­ing to the 1862 civil war bonds that helped fi­nance the US army and World War II bonds sold by celebri­ties at the time.

With the mar­ket rak­ing in bil­lions of dol­lars a year, it seems the ap­petite for these new debts is grow­ing as well as the emer­gence of new types of is­suers as ev­i­denced by the case of Johannesburg. In March 2014, cor­po­ra­tions like Toy­ota joined the fray to fund con­sumer loans for elec­tric and hy­brid cars. Dur­ing the same pe­riod, the global con­sumer goods com­pany Unilever and the French util­ity com­pany GDF Suez of France is­sued green bonds to fi­nance their re­new­able energy and energy ef­fi­ciency projects.

Although there is no mar­ket stan­dard for the def­i­ni­tion of green, Mar­i­lyn Ceci, man­ag­ing di­rec­tor and head of Green Bonds at JP Mor­gan wrote in the global knowl­edge shar­ing plat­form called

Meet­ing of the Minds, in Fe­bru­ary 2015, that there are the Green Bonds Prin­ci­ples (GBP), which serve as vol­un­tary guide­lines on trans­parency and dis­clo­sure and are en­dorsed by en­vi­ron­men­tal groups, in­vestors and other is­suers.

Trans­parency

The four com­po­nents of the GBP in­clude a de­scrip­tion of how the pro­ceeds of the bonds are to be used, an out­line of the de­ci­sion-mak­ing process dis­clos­ing the cri­te­ria used to re­view and de­ter­mine the el­i­gi­bil­ity of the pro­ject, as well as track­ing the pro­ceeds and re­port­ing on how they are be­ing used at least once a month.

The World Bank ini­tially set the bar high with its rig­or­ous six-stage se­lec­tion, ap­proval, re­view and re­port­ing process. The el­i­gi­bil­ity cri­te­ria are ver­i­fied by ex­perts from the Nor­way-based Cen­tre for In­ter­na­tional Cli­mate and En­vi­ron­men­tal Re­search (CICERO). In­ter­ested in­vestors can check the in­sti­tu­tion’s web­site to get de­tailed up­dates on the projects, com­plete with pic­tures, graph­ics and sum­maries.

The World Bank ap­plies a “gold stan­dard” in the se­lec­tion of its el­i­gi­ble projects. For ex­am­ple, the bank’s green bond port­fo­lio will not in­clude nu­clear projects or those that deal with nat­u­ral gas ex­trac­tion by frack­ing. The bulk of the bank’s green bond projects are in mid­dlein­come coun­tries like Mexico, China and Africa’s Maghreb re­gion like Egypt, Tu­nisia and Morocco whose low-car­bon projects funded by the World Bank are in full swing.

Projects in sub- Sa­ha­ran Africa re­ceive sup­port through the In­ter­na­tional De­vel­op­ment As­so­ci­a­tion (IDA), the bank’s fund for the poor­est, which doles out “low­in­ter­est loans, cred­its or grants from donors rather than from cap­i­tal mar­kets”.

How­ever, while African coun­tries south of the Sa­hara have made a grand de­but into the in­ter­na­tional debt mar­ket scene, their pres­ence in the green bond mar­ket is nascent. For now it seems, Johannesburg is lead­ing hav­ing listed the first “African green city bond” in the re­gion.

So­lar pan­els be­ing cleaned at the Ain Beni Mathar In­te­grated Com­bined Cy­cle Thermo-So­lar Power Plant in Morocco.

World Bank/Dana Smil­lie

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