Martins Hile, Editor, Financial Nigeria magazine

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Developing green investment market in Nigeria 10 Aug 2020

Key market developments in Nigeria indicate the country is aligning with global trends to mainstream sustainability into finance and investment. In 2017, the Federal Government of Nigeria (FGN) issued a N10.69 billion green bond. The issuance was the first sovereign green bond in Africa. The FGN green bond was subsequently listed on the Nigerian Stock Exchange (NSE). Still on the public sector side, last year, the country listed a N15 billion series II green bond, which the Debt Management Office (DMO) said it would follow-up with another issuance in 2020.
In 2018, FMDQ Securities Exchange launched the Nigerian Green Bond Market Development Programme in partnership with Climate Bonds Initiative (CBI) and Financial Sector Deepening Africa to provide a framework for green finance for the private sector. Subsequently, North South Power Company Limited, through its special purpose vehicle – NSP-SPV PowerCorp – issued the maiden corporate green bond in the country in 2019. The N8.5 billion series 1 green bond for development of the company’s sustainable energy project was 160 per cent subscribed with commitments from institutional investors, including pension funds. Also last year, Access Bank issued a N15 billion green bond and the first-ever CBI-certified corporate green bond in Africa.
On its part, the NSE is also playing a key role in helping to develop green investment opportunities in the capital market. The bourse has issued guidelines to encourage good corporate governance and transparency among companies or issuers listed on the NSE. It is also helping to get listed companies to integrate sustainability reporting.
For a debt instrument to qualify as a green bond in Nigeria, proceeds from the instrument must be used for renewable and sustainable energy; clean transportation; sustainable water management; climate change adaption; energy efficiency, sustainable land use; biodiversity conservation; green buildings and other categories that are subject to approval by the Nigeria Securities and Exchange Commission (SEC).
Apart from green bonds, other innovative financing solutions that have been created to finance the transition to a low-carbon economy include green loans, green commercial paper and sustainability-linked instruments. Green financing instruments are a necessity in meeting Nigeria’s commitment to the global agenda for sustainable finance. The country is a signatory to the UN Sustainable Development Goals (SDGs). Under the Paris Agreement, Nigeria has committed to reduce its greenhouse gas (GHG) emissions by 20 per cent unconditionally, and 45 per cent with international support, by 2030.
A report by United Nations Environment Programme (UNEP) shows that Nigeria's sustainable investment financing gap is nearly $100 billion annually up to 2030. The financing gap for infrastructure alone is N36 trillion (or $100 billion) every year for the next 30 years, according to Nigeria's Minister of Finance, Budget and National Planning, Zainab Ahmed. Meanwhile, total approved capital expenditure in the last five federal budgets was less than N13 trillion. This highlights the role the private sector needs to place in plugging the financing gap for the country’s sustainable development targets.
To have a dynamic green finance market in Nigeria, there is a need for diversified pool of innovative financing solutions in the financial sector, particularly in the banking sector. For instance, following the increase in the loan-to-deposit ratio (LDR) of commercial banks to 65 per cent, lending in the banking system has increased. Total credit in the banking system increased from N15.56 trillion in May 2020 to N18.9 trillion as of June ending. Similarly, a policy of encouraging banks to provide green credits as strategy to develop the market for green finance is due.
In Bangladesh, for example, a central bank policy has helped to significantly increase green loan portfolios of banks. Bangladesh Bank, the name of the reserve bank in the country, requires banks and other financial institutions to dedicate a minimum of five per cent of their total loan disbursements and investments to green financing annually.
According to the China Banking Regulatory Commission, the share of green loans as a percentage of total loans reached 10 per cent of the portfolios of the top 21 Chinese banks in 2015. In Brazil, green loans grew from 11 per cent of bank’s portfolios to 14 per cent between 2013 and 2015. Green finance is growing from a recent zero base in Nigeria. But the country remains at a very low position in meeting its needs for green financing.
Opportunities for green investment abound in several sectors of the Nigerian economy, ranging from energy to agriculture, transportation, housing, manufacturing, among others. The country needs to invest in climate-smart agriculture. This means improving yields on same farmland, while preserving forests. Globally, agriculture alone contributes 19-29 per cent of total GHG emissions. Land degradation and deforestation are two areas of human activities that are directly impacting the environment in Nigeria – like many other developing countries.
Nigerian policymakers and regulators have important roles to play in moving green finance in Nigeria from a niche market to becoming mainstream. This will be achieved by promoting increased awareness, mandating disclosure and transparency in the carbon footprints of organisations, and encouraging innovative financial products and services through smart regulations. While expanding investment opportunities in the country, the development of the green finance market is a vital pathway to achieving a low-carbon future and sustainable development.
Among the key attributes of green finance is that proceeds from the financial instruments have to be used for sustainable development projects, particularly projects with low-carbon footprints. Green finance is also an instrument of funding public policies that foster environmental sustainability.
Globally, awareness about green finance has been growing in the last few years, even as investments in the alternative financial instruments have been ratcheting up. According to CBI, global green bond and green loan issuance reached $257.7 billion in 2019, a 51 per cent increase from the 2018 figure. In June 2019, the Global Sustainable Investment Alliance (GSIA) reported that sustainable or green assets under management had reached $30.7 trillion – a 34 per cent increase from 2016. The Nigerian government, regulators, financial institutions and project developers need to work together to attract a significant share of the growing sustainment investment assets for investment in the country.