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Are Social Impact Bonds the ESG panacea?

In a fast-paced sustainable finance market currently struggling with how exactly to best align capital with environmental, social and governance (ESG) objectives, social impact bonds (SIBs) emerge as yet another innovative but puzzling instrument....


Africa is the continent most vulnerable to climate change. Unfortunately, African countries do not have the wealth to implement the adaptation measures needed. One of the tools most promising to support specific climate-related and environmental projects is green bonds. Nonetheless, the African green bond market is lagging behind due to institutional and market barriers that prevent countries from issuing them easily. Some African states have managed to overcome these barriers, and some of the barriers have proved to be less critical than previously thought, yet they still have a negative impact. Therefore, closer cooperation among African countries might help address these issues.

Green Bonds: A Resource for Africa

Africa is the continent most vulnerable to climate change and climate variability, a situation that is aggravated by the interaction between ‘multiple stresses’ at various levels and low adaptive capacity. More than 90% of the African countries have ratified the Paris Agreement and submitted their nationally determined contributions (NDCs), the implementation of which by public authorities could drastically increase the resilience of the continent. However, despite the willingness to address climate change issues the domestic public resources committed ($264 billion) will cover less than 10% of the estimated total need ($2.8-3.4 trillion). This is why African governments must leverage international public sources and the domestic and international private sectors to fill the gap. One of the most promising tools to unlock significant capital for sustainability-related investment is green bonds.

The value of green bonds issued globally reached a peak of $582 billion in 2021 and a similar amount was reached in 2022 ($487.1 billion). Nonetheless, the share of green bonds issued by African states remains extremely low, in particular if we focus on issuances by public institutions, which are in charge of implementing NDCs. Therefore, what are the barriers that prevent the African green bond market from taking off?

African Green Bonds: Barriers

Two types of barriers can be identified: market barriers and institutional barriers. Among the former we can pinpoint the following:

  • A lack of local demand. Overall, the demand for green bonds among African investors is stagnant due to a low level of awareness of opportunities to invest in green assets. Consequently, issuers with portfolios that contemplate green projects are not matched by a pool of local investors ready to finance them.
  • A lack of supply. Despite the relatively strong appetite of international investors for green products issued in emerging markets and developing economies, the African green bond market is perceived to be underdeveloped and unappealing. Furthermore, there are uncertainties linked to the preparation and prioritisation of strategic green projects by African governments.
  • Transaction costs. The issuance cost of a green bond, considering the additional transaction cost, is a bottleneck that might discourage potential issuers, thus negatively impacting the pace of growth of the nascent African green bond market.

Among the institutional barriers we can identify the following:

  • Lack of capacity. Before issuing a green bond, issuers must be trained and recruit staff knowledgeable about environmental, social and governance (ESG) regulations. This is necessary to be able to develop an environmental accounting system and to formulate sustainability reports for investors, shareholders and customers.
  • Small projects. Eligible African projects and assets that have been identified and verified as green are usually small in size and they are unable to attract a significant base of investors, as the most prominent international financial institutions can.
  • A lack of incentives. African policies promoting the green bond market do not usually have an adequate framework to reduce the high cost of the capital required, for instance to support investments in low-carbon and climate-resilient infrastructure.
  • A lack of guidelines and taxonomies. African countries do not have clear frameworks to guide financial actors through the issuance process and criteria, which prevents many potential players from entering the market.
Who Jumped the Fence and How?

Despite the presence of these barriers, green bonds have been successfully issued by public institutions in Nigeria, South Africa, The Seychelles, Morocco and Egypt. The lack of local demand has been tackled by spreading knowledge of sustainable finance and green assets. In the case of Nigeria, for instance, the government organised many conferences and events gathering market operators and investors, thus mainstreaming the concept of green bonds. In doing so, the government relied on support provided by more skilled actors such as NGOs with expertise in the field of sustainable finance. On the other side of the market, a steady supply of investment opportunities was provided by identifying bankable projects that could be linked to the achievement of NDC objectives. Furthermore, to ensure the quality of the supply, the government ensured that the green bonds met international standards or received an international certificate. However, in order to increase the quality of their issuances, African actors relied on international companies for independent verification due to the lack of local auditors and verifiers, which raised transaction costs.
Similar to what was done to address the lack of local demand, the lack of capacity was overcome by providing all interested stakeholders with training in ESG, verification processes and international reporting standards. Capacity building exercises allowed the public authorities to successfully design clear policy frameworks and to list rules supported by explanatory guidelines. The small size of projects did not represent a barrier, since all the issuances were significantly smaller than the size suggested in the literature (> $200 million) but they still managed to attract the attention of international and institutional investors. For instance, an issuance that took place in Cape Town worth $83 million was oversubscribed by more than 29 investors. Investors were also attracted by incentives like tax exemptions and rebates. Finally, the African authorities that issued green bonds proved able to design consistent political and legal frameworks underpinning the green bond infrastructure.

Sharing Experiences and Market Integration

Many barriers have been overcome or have proved less critical than was previously thought. However, overall, the African green bond market is still underdeveloped and its potential underexploited. In particular, the relatively high transaction costs might have negatively influenced the number of issuances that public authorities could afford. In addition, more measures are needed to scale up the nascent green bond market and increase its geographical width, since it is still too small to considerably impact the achievement of climate and sustainable goals.

Closer cooperation among African countries might help address these issues. For instance, countries that have already issued green bonds might share their experiences with others that are struggling. Since the problems are similar across the continent, successful issuers might provide others with guidelines as a blueprint to achieve the same result. More market participants would increase the size and attractiveness of the market itself, while greater collaboration among financial actors could foster greater market integration, making it more appealing to investors. If green bonds become more prominent in the continent, it is more likely that local auditors and verifiers will be employed, reducing transaction costs and encouraging more issuances.
Nonetheless, African countries need to bear in mind that even if they share similar challenges in issuing green bonds, they might have different mitigation, adaptation or development targets. This is why it is important for each public authority to link the use of proceeds to projects that prioritise the achievement of its own NDC objectives in the design of green bond issuances.

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