The devastating effects of climate change on our daily activities in the future is no longer up for debate. The world experienced the highest temperature ever this year, with Kuwait recording 62 degrees Celsius. Some parts of the globe are more vulnerable than others. There is no doubt that Africa as a whole will be greatly impacted by these extreme weather conditions. From Nigeria in the West right through to Mozambique in the South East, the continent is experiencing environmental and climatic changes such as droughts and typhoons which continue to put pressure on their various economies.
‘The transition to a low-carbon economy is possibly the greatest global challenge for this and future generations, estimated to be worth tens of trillions of dollars in required investment over the coming decades. The financial system we need is one that fully supports and facilitates the transition towards a green economy, requiring the combined and sustained efforts of global bodies such as the United Nations (UN), national governments and financial services organisations of all shapes and sizes’ - Sir Roger Gilford – Chair, UK Green Finance Initiative
The received wisdom is that trillions of dollars’ worth of investments in projects with positive environmental and/or climate benefit is needed to stop/prevent the global rise in temperature. The global appetite for green bonds continues to grow yet again 2019, as private money, institutionally managed funds and sovereign governments chase after green infrastructure investment opportunities. Green Bonds outstanding at the end of August stood at $147 billion, with Europe recording almost half that amount at $70 billion. In comparison, $0.2 billion of green bonds were issued in Africa for the same period in Africa.
All this talk about climate and green bonds to address climate change issues, and yields of vanilla government and corporate bonds in more developed market being so low, If the region is billed as the final frontier for investment opportunities, why then is the level of issuance so low? With potential returns so high, why isn’t the smart money flowing into Africa? Is this to do with the perceived risk associated with the regions or is the market structure not ready for these types of investment opportunities? Will technology enable capital markets in Africa to leapfrog over a predominantly brown development phase, eventually play catch up with the West? Sadly, there is a real danger of Africa being left behind in the race to building green and sustainable economies, the strict application of most policies being deployed in the fight against climate change do not readily address infrastructure challenges faced by most African on a daily basis. Access to adequately funded and well-run infrastructure would improve the lives of African immensely, especially women and the youth, who comprise up to 65% of the population in some countries.
To meet the Sustainable Development Goals (SDGs) and address Environmental Social and Governance (ESG) issues, African countries need massive investments in education, human rights & conflict resolution, health, clean energy, infrastructure and industry. These investments must also create high-end jobs for professionals and university graduates as well as meet the needs of the “Bottom of the Pyramid” (BoP). According to the World Bank in 2011, Nigeria needs to spend an average of $14 billion per year for at least ten years in order to close its infrastructure gap. A rather conservative figure when compared to the Government’s own 2018 figures of $33 billion. However, with actual revenues of $13 billion, to cover its recurring expenses, debt servicing obligations and capital expenditure, one can see from a closer look at the country’s finances that Nigeria does not have that kind of money on infrastructure.
Nigeria has a major energy deficit. The grid is incapable of supporting the country’s industrial ambitions. It is often said that, in order to industrialise a country, approximately a megawatt of power needs to be generated for every million people. With a population size of almost 200 million people, Nigeria would need to generate in excess of 150 megawatts of power. Today, power in the grid barely reaches 5 megawatts. Most of the power used in Nigeria is self-generated. Similar to countries like Australia, Poland and South Africa, where the power sector is heavily dependent on coal, Nigeria’s generates most of its energy from fossil fuel (predominantly diesel for industry and kerosene for domestic use in rural areas) due to an inadequate grid infrastructure.
A closer look at Nigeria, which has made great strides in diversifying its economy over the last few years. However, it still derives some 90% of its foreign receipts from the exportation of crude products. With a growing population predicted to exceed the 300 million thresholds in the next 15 years, 65% under the age of 35 and a substantial level of youth unemployment, implementing a just transition strategy is key. A future economy for Nigeria needs to be inclusive, low carbon and resilient, with a focus on tackling gender balance and youth employment as well as improving the lives of those in BoP communities. Though evidence does show that a shift to a more resilient economy will boost prosperity and generate additional jobs, the quality of those jobs needs to ensure that the majority is not left behind and negatively impacted by the transitional challenges.
The reality is that after 50 years of trading with the world, the comparative advantage for most African countries is still in extractive resources. The continent is clearly awashed with investment opportunities as the money keeps on coming and contracts keeps getting signed, despite ineffective governance, a lack of democracy and proper rule of law. Recognising Africa’s unique challenges in addressing the impact of climate change, which are primarily are due to the underdeveloped state of its infrastructure, perhaps there is some wisdom in supporting the argument for channelling private sector green investment into existing high-carbon assets (especially for countries like Nigeria) on the condition that the receipts are used to finance investment in new low-carbon infrastructure and sustainable industries.
Eliminating or capturing gas that would otherwise have been flared, not only helps to meet Nigeria’s Nationally Determined Contributions (NDCs) by reducing greenhouse gas (GHG) emissions, but also addresses deforestation, help meet the growing power demand that is crucial for growth. It is also in line with the broader objects of Green Finance, which include:
· “funding any means of reducing carbon emissions or raising resource efficiency.” – UK Green Finance Initiative
· “achieving economic growth, while reducing pollution and greenhouse gas emission, minimising waste and improving efficiency in the use of natural resources” - OECD
· “financing of investments that provide environmental benefits in the broader context of environmentally sustainable development. …for example, reductions in air, water and land pollution, reduction in greenhouse gas (GHG) emission, improved energy efficiency while utilising existing natural resources” – G20 Green Finance Study Group
· Green finance includes, but is not limited to – environmental aspects (pollution, greenhouse gas emissions, biodiversity, water or air quality issues) and climate change-related aspects (energy efficiency, renewable energies, prevention and mitigation of climate change-connected severe events)
People must always come first in any transitional process of sustainable development in Africa. So, governments and regulators need to employ enabling policies to back the private sector, successfully build up a network of pipeline operators and energy producers that can easily access capital in a low-interest environment. Whilst one does not advocate for new investments to flow into fossil fuel, accelerating the shift to a sustainable and low carbon economy for countries in African requires investment in existing natural resources that guarantee high returns with the purpose of investing the returns solely in low carbon assets.
Sceptics may argue that this could be difficult to achieve due to the governance challenges in these markets. However, enforcing the tenets of the Green Bonds Principles, underpinned by the External Review is a means of achieving this objective.
The Green Bond Principles (GBP) are voluntary process guidelines that recommend transparency and disclosure and promote integrity in the development of the green bond market by clarifying the approach for issuing a green bond. The four core components of the GBP are:
· Use of Proceeds
· Process for Project Evaluation and Selection
· Management of Proceeds
The Green Bond Principles emphasises the required transparency, accuracy, and integrity of information that will be disclosed and reported by issuers to all stakeholders.
In conclusion, for communities in Africa to stand a chance against the overwhelming impacts of climate change, finance must transcend the strict verticals of Green, SDG, ESG, Impact and other labels, and seek opportunities with economic and developmental agendas with more social benefits for gender balance and youth empowerment first. For example, financing solar energy projects with gas backup generators rather than diesel, a focus on bio-diversity or reforestation projects through an Adaptation & Resilience-led Transition Finance strategy will do more in moving the pendulum towards a sustainable low-carbon economy rather than insisting on waiting for strictly green investment opportunities only.