The potential of GSSS Bonds ?
Never before has the world faced a more critical gap in funding core development challenges, as captured by the UN Sustainable Development Goals (SDGs) and the Paris Climate Agreements. The yearly SDG funding gap stands at USD3.7 trillion. The annual private philanthropic spending for development stands at USD8 billion while ODA at USD 150 billion1. With some USD 212 trillion the opportunity lies in the financial sector which offers a largely untapped potential to promote climate change mitigation and adaptation by directing investments toward low-carbon and resilient projects and initiatives. Bond markets are a good example of this. One of the most widely used instruments for green finance are green, social, sustainability and sustainability-linked bonds (GSSS), these are regular bonds whose proceeds are used only for defined green projects. With an estimated global capitalization of USD129.3 trillion as of 2021, bonds represent the main source of capital for most sovereign governments and public and private financial institutions. GSSS bond issuance, reached over $1.1 trillion in 2021 and is expected to top $1.5 trillion in 2022. In Africa, there are only four sovereign issuers of GSSS bonds.
So what is the problem?
Yet, to date, green bonds in Africa represent less than 1% of total issuances world-wide estimated at the $400 billion each year[1] . The total estimate green bonds issued to date in Africa being $3.96 billion. Generally the most common barriers are:
1 – lack of capacity within governments
2 – perceived high risk/reward profile due to lack of awareness and understanding of the instrument
3 – lack of green projects pipeline to justify issuances.
Indeed, these debt financing instruments are restrictive on the types of projects that can be financed and have significant administrative and compliance costs.Moreover, the yield gap between green and regular bonds is not large enough to justify the issuance of green bonds for most countries in sub-Saharan Africa. Green bonds are more suitable for quality issuers because the yield spread and liquidity are much better compared to conventional bonds. Finally, there is a strong need for supervision and standardization of regulatory framework.
What is the solution ?
Integrating environmental and social considerations into bonds and turning them “green” could increase the volume of GSSS bond issuance and flow of finance to countries. Integrating climate, social inclusion, and green recovery considerations into project design, on the other hand, may attract buyers and may help countries meet their climate targets set in their Nationally Determined Contributions (NDCs) and Sustainable Development Goals (SDGs).
What is GGGI’s contribution to the said solution?
The Global Green Growth Institute (GGGI) supports developing countries to transition to an environmentally sustainable and socially inclusive economic model of growth by leveraging the financial sector and capital allocation decisions. GGGI has strong expertise and a growing portfolio of green bond initiatives across geographies and issuer categories. To date, GGGI has supported its Member countries, issuing green, social, and sustainability bonds, mobilizing USD5 billion from Domestic and international capital markets for climate change mitigation, adaptation, and green economic recovery.
How is it done?
GSSS bond issuance process is similar to that of a regular bond, with an added emphasis on governance, traceability and transparency designed to increase investor’s confidence in the green, social, sustainability credential of the bond, and prevent accusations of ‘greenwashing’ to the issuer.
In Peru, through financing from the UK PACT (Partnering for Accelerated Climate Transitions) Green Recovery Challenge Fund (2021–2022), GGGI delivered technical assistance to the Government of Peru to develop the capacity and systems to issue the country’s first sovereign sustainability and social bonds. GGGI assisted the Ministry of Economy and Finance in defining the issuance strategy and objectives, formalizing the sustainability bond governance structure, and developing the government’s Sustainable Bond Framework. The Framework defined the use of proceeds, the project selection process, the management of proceeds, and the reporting methodologies, indicators, and commitments. Peru’s Sustainable Bond Framework received a positive Second Party Opinion from Sustainalytics and was officially adopted as a sovereign debt instrument on July 2021 via Ministerial Decree No. 221-2021-EF/52. In October 2021, the Government of Peru issued its first-ever sovereign sustainability bond for USD3.2 billion, followed a few weeks later by the country’s first social bond issuance for EUR1 billion.
GGGI-partner issuers report several financial and non-financial benefits of the issuance of green bonds, including reduced interest rates, increased investors diversification, enhanced coordination between finance and sustainability teams, improved visibility, increased flow of private sector finance to mitigation and adaptation projects, and many more. The main funders of GGGI’s green bond technical assistance are the Green Climate Fund, the Government of the Republic of Korea, the Government of Luxembourg, and the Government of the UK.
In Cote d’ivoire the first private initiative green bond issue from Francophone West and Central Africa could pave the way for new issues in the region. Eight-year bonds of Emergence Plaza, owner of Ivory Coast’s most visited shopping complex, Cosmos Yopougon, were issued in august 2021 at a yield of 7.5%. The proceeds from the issuance of 10 billion CFA francs ($18.1 million USD) will be used to refinance a bank loan with a local bank and to support the company’s future projects by strengthening its financial and operational solidity. The issue, which was oversubscribed, was quoted at 150 basis points, below the 9% interest rate it was paying on its 8.4 billion CFA bank loan. Only $64 million was issued by non-financial companies before the Cosmos Yopougon operation, according to data compiled by the Climate Bonds Initiative, a think-thank specializing in green finance. Cosmos Yopougon thus becomes one of only three African non-financial companies to issue green bonds, after Acorn Holdings (Kenya) and North South Power Company (Nigeria). This issue is also the first green bond issued by a West African company in the real estate sector.
What are the key takeaway points?
Africa today faces multiple challenges, including debt burden and historically high cost of borrowing; post-Covid recovery; climate change issues; energy and food shortages due to the war in Ukraine. These challenges make it all the more necessary for African States to benefit from new means of raising funds from private investors in a transparent and efficient framework and at reasonable rates. Financing critical green growth and adaptation needs in Africa is central. Green and sustainable bonds, and the increased level of transparency they bring, can help many countries in the region on their journey to securing market financing for future investments.
Olola Vieyra
Country Representative Cote d’Ivoire – Global Green Growth Institute
Ferruccio Santetti
Deputy Head of Programs and Investment for LAC – Global Green Growth Institute