Green Bond: A Financing Alternative for Environmental Friendly Projects

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Green Energy Photo: Courtesy

By Michael Ochieng Obuya

Environmental change has become a critical issue globally with world’s superpowers led by the United States of America and mediated by United Nations Environmental Programmes (UNEP) weighting on possible solutions to mitigating or adapting to climate change. Kenya like other environmentally conscious countries identify financing alternatives to support actions aimed at mitigating and adapting to climate change.  Green bond is one of the financing alternatives that has proved useful world over and needs to be embraced by Kenya in financing sustainable development projects.

What is Green Bond?

A Green bond is a class of debt instruments like conventional bonds that promise fixed or variable returns to investors over the life of the bond and whose proceeds are solely used to finance or re-finance green projects. The funds received from green bond holders are earmarked for investing in sustainable development projects. The green bond is a debt instrument of which investors lend funds to an entity that in turn uses the money for specified period of time at fixed or variable interest rate to finance green projects.

Green Bonds Types

Currently, four green bonds types are being offered on the global market. The first one is the Green Project Bond where an investor faces credit risk from the inherent risk of the project (s). The proceeds are invested with or without potential ‘recourse to the issuer’ (if the principal is not returned to an investor in full, the investor can recover unreturned principal from the issuer), recourse is to the project’s balance sheet. The second is the Green ‘Securitized’ Bond which is secured against one or more specific projects grouped together. The third is the Green ‘Use of Proceeds Revenue’ Bond which is without recourse to the issuer. Bond is backed by the pledged revenue stream of projects. The use of green bond sale proceeds is channeled to related or unrelated green project(s). The fourth bond is the Green ‘Use of Proceeds’ Bond whose sale proceeds are exclusively for green projects and are secured against issuer’s entire balance sheet. The bond has a standard recourse to the issuer.

Operation of Green Bonds

Like conventional treasury and corporate bonds, green bonds are issued by governments, municipalities,  multi-national banks and multinational companies’ .The issuer of the green bond guarantees to refund the bond price at maturity of bond plus either a variable or a fixed rate of interest on the bond (Coupons) . The returns from the bond are usually tax exempt in a number of countries. The bonds are risk-weighted and credit rated based on the credit worthiness of the issuing entity. A green bond holder can trade the bond in the bond market segment of stock exchange market for instance NSE when the green bond is finally issued making the debt instrument  liquid.

The Place of Green Bond at NSE

Global issuance of green bonds stood at 46 billion USD in 2015 according to Bloomberg New Energy finance. It is expected to rise to about 55 USD in 2016.Though there has been tremendous growth in green bonds, it still commands small proportion of the global overall bonds market which stood at 93 trillion UDS at the end of 2015.Hence there is still a great potential for the green bond market to grow and expand. Kenya should also partake in this endeavor by issuing the green bond at the NSE as early as it is practically possible.

South Africa is leading in Africa in terms of Green Bonds issue at the stock exchange. South Africa’s city of Johannesburg raised a 142 million USD municipal Green Bond that targeted clean development projects. The World Bank’s International Fiancé Corporation (IFC) also issued a 9 year 1 billion Rand green bond via the Johannesburg stock exchange.

Currently, Kenya is in talks with international investors to make arrangements for the sale of the country’s first ever Green bond at the Nairobi Securities exchange. The stakeholders, including CBK, CMA, KBA, National treasury and NSE, are currently working on regulations needed to trade the security at the NSE. When the green bond is finally issued, it will add to the Kenya’s outstanding corporate and sovereign bond of about 1.8 trillion KES including EURO bond as at October 2016.

Viable projects for green financing

The issuers of green bonds are expected to direct the proceeds to finance clean and sustainable development projects. Kenya Bankers Association plans to issue the first Green bond to be marketed abroad to mobilize cheap funds. The sale proceeds are to be loaned to individual commercial which are members of the association who are in turn expected to loan the funds to individuals or businesses involved in green projects in such sectors as energy, transport, agriculture, infrastructure and building, water and waste management and urban planning.

 

The viable projects to benefit from green bonds financing are those that are carbon neutral that project that cuts on the production of carbon into the atmosphere. The projects may include geothermal plants, wind power plants, biogas plants, solar energy, energy efficient building, mass and rapid transport, clean transport like electric cars, waste and water recycling plants, organic agriculture, protection of water catchment areas est.

Parting note

Entreprenuring individuals should identify qualifying viable business ideas and projects to take advantage of the cheap green financing to be introduced in Kenya.

The Author is a Lecturer of Finance and Economics at Mount Kenya University School of Business. Email: Obuyamike@gmail.com