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Breakthrough instrument launched at COP27 to unlock green bonds in Africa
Updated: Nov 20, 2022
The lending market for African bonds received a major boost at COP27 with the inaugural injection of US$100 million into the Liquidity and Sustainability Facility.
Steve Umidha, bird story agency
Sustainability investors may look to snap up deals in the lending market for African bonds following an injection of US$100 million into the Liquidity and Sustainability Facility (LSF) by the African Export-Import Bank (Afreximbank) and Citi, one year after the specialised financing instrument was mooted at COP26 in Glasgow.
The LSF, which could reach up to US$30 billion in five years, is a UN-backed short-term lending market designed to compress liquidity premiums and improve sovereign access to international bond markets for African countries through a repo market for the region.
It seeks to encourage the issuing of sustainability-linked bonds by African governments, offering investors favourable terms for using them as collateral in repo transactions as an alternative but cheaper funding source to bridge the continent’s financing gap in coping with climate change.
Dr Vera Songwe, the Chairperson of the LSF’s Board, confirmed that new clients were being signed on to the platform; However, she would not offer further details, only adding that two large American and European fixed-income investors would soon be coming to the table.
“This is an important edifice for emerging markets generally and we hope we can grow the facility to support many more countries, especially in these challenging times. It is a privilege to be supported in that endeavour by such leading international financial institutions,” Songwe said.
If Africa is to mitigate against and adapt to the realities of climate change, it needs huge investments in sectors like renewable energy production, sustainable transport, and climate-smart agriculture.
The LSF is expected to play a critical role in meeting those goals. It hopes to attract more than 120 eligible African sovereign Eurobonds with maturities extending up to one year.
According to World Bank estimations, the global issuance of green, social and sustainable (GSS) bonds reached more than US$1.1 trillion in 2021 and is expected to surpass US$1.5 trillion in 2022. However, sovereign sustainable bond issuance is still quite limited, representing only 11 per cent of the total in 2021.
There are only four sovereign issuers of GSS bonds in Africa. Egypt was the first, followed by South Africa, Morocco and Nigeria. Other countries are beginning to enter the market.
Ghana, for instance, launched a dedicated green bond platform called the Green Exchange in February this year “to enable companies to issue billions of US dollars in green bonds and for investors to trade the debt in a secondary market”.
In July 2021, Benin sold a €500m 14-year SDG bond, indicating that smaller economies on the continent are considering such bonds as a source of financing.
East Africa’s largest economy, Kenya, has conceptualised a Sovereign Green Bond framework to secure alternative green and sustainable funding sources to finance its environmental goal.
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