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How Will Kenya Fare in the Green Bond Market?

Kenya enters the green bond market. What are the possible implications for the country and potential investors?

In May 2018, the Kenyan Treasury Principal Secretary, Dr Kamau Thugge, announced that Kenya would start planning the legal framework to support issuing green bonds, the culmination of a journey started in 2016 at the United Nations Environment Assembly. The proposition was suggested by Amina J. Mohammed, then Nigeria’s Minister of Environment and now Deputy Secretary-General of the United Nations.

Starting in 2018, the three-year project will be supported by the Treasury and Central Bank of Kenya (CBK) and monitored by the International Capital Market Association (ICMA). This agenda for Sub-Saharan Africa will move the country further towards the 2030 Green Economy Strategy and Implementation Plan (GESIP) to become a regional leader of green bonds and be able to transfer knowledge, practice and frameworks to other countries in the region which is overseen by the East Africa Bankers Committee.

Across the region, strategic government policy changes will promote more investment channels and the collaboration between other potential issuers in the market in an institutional investment community. The changes will also provide a means to support smaller corporates and banks to enter the market.

Kenya will become the third country in Sub-Saharan Africa to follow this initiative, following Nigeria and South Africa. In December 2017, Ibrahim Jibril, the Nigerian Environment Minister, announced that Nigeria was the first regionally and fourth globally to issue bonds for environmental project funds of around USD 64mn, Reuters published. Jibril also commented last year that “climate change is real, and business, government and the capital market need to work together to slow its effects,” a sound reiteration of many other countries around the world, following suit.

The GESI Plan is to use the bonds to finance renewable energy micro-utilities and afforestation programs according to the country’s Debt Management Office. One such project is the ‘Energizing Education Programme’, which aims to provide reliable renewable energy supplies, such as solar and hydro power, to 37 universities and 7 university hospitals across the country.  Around 90% of Nigeria’s industrial export came from crude oil in 2016 according to an International Monetary Fund (IMF) report. Nigeria is moving away from its worst economic downturn in over 20 years and so this provides a stimulus for growth and economic rehabilitation.

Green bonds are becoming increasingly popular around the world and more recently within emerging markets, as countries race to mitigate the devastating effects of global warming. The green bond market overall has grown in the last 10 years with an approximate $155 billion issuance in 2017 and a forecasted growth to $250 billion in 2019 reported by Moody’s Corporation.

A major initial hurdle would be transitioning global communities away from carbon-reliance. The World Bank’s target of $53 trillion in clean energy investment needed by 2035 is dependent on this paradigm shift. The ever-growing allure of capital gain and the ability to rebuild economies is attracting many emerging markets including India and Latin America. Although the green bond market is growing rapidly, it still represents a fraction of the overall fixed-income market. Demand is higher than supply, shown by the fact that financial liquidity is distorted but, over time, this may improve with even further demand for new green bond issuance. Green bonds can often work well as PR campaign tools, projecting businesses as responsible and environmentally conscious but they can also simultaneously hold inherent reputational risk. The issuer must bear additional costs required to issue the green bond, while also providing returns similar to a normal bond. Expenditure must include maintaining the proceeds as 'green' with provided legal documentation.

ICMA principles and taxonomies remain open to interpretation, but organisations such as the Climate Bond Initiative (CBI) are also developing their own criteria for verifying green bonds. This implies standardisation and the emergence of generic bonds, known as ‘plain vanilla bonds’, but this could work in direct opposition to innovation. The key for any project is to select the right bond as increasing variations emerge, such as corporate, project, asset-backed security, supranational/sovereign, municipal, and financial bonds.

In terms of investors, banks and insurers are still willing to finance quality projects, but due to the regulatory environment in which they now operate, banks are usually also looking for syndication, shorter-term debt and the ability to exit the project quickly to spread the risk of their investment. One of the more vocal insurers is Zurich, who announced it had achieved its 5-year goal of investing USD 2bn and, since their initial pledge, have become one of the largest investors in the green bond market. Zurich’s Chief Investment Officer, Cecilia Reyes, said that “green bonds are a good fit with Zurich’s overall investment strategy, as well as its impact investing aspirations, targeted to support sustainable development and resilient communities. It is an opportunity to invest both with impact and at a return fully compensating for the risk.” It is essential for insurers to formulate and monitor potential climate change and scenarios which pose risk through modelling tools, while also integrating Environmental, Social and Governance (ESG) factors in to investment programmes and benchmark indices. The insurers will have to be at the forefront of driving change initiatives and must advocate for more green policies.

As it stands now, the future is still unknown for Kenya and any entrants in to the green bond market. Due to demand, new issuances are forecasted to expand rapidly over the short term, but the market is still in an early stage of development. With regulation continuing to evolve as well as current climate of policy uncertainties in Kenya. The main indicator of success will be the price. If green bonds can be issued at a discount to comparable corporate debt, this will demonstrate that investors value the 'green' component of the investment in addition to the traditional bond yield.

A robust development and bond sustainability plan, as well as a sound strategy and risk mitigation solution must be in place. There must also be transparency in communicating performance to the investors over the lifetime of the bonds in order to meet regulation. The market has vast potential but, in the meantime, it is difficult to foresee environmental impacts and certain risks.