The African market is known for its political and economic turbulence, making it challenging for lenders to provide funding for investors. As a result, only 5 green bonds have been issued so far on the continent, making up only 0.4% of the rapidly growing global green bond market. Green bonds are vital to helping fund sustainable projects in order to mitigate the climate change risk in Africa. They have a clean track record of successful projects and funding with high perceived risk due to political instability and turmoil. This is due to the fact that green bonds provide greater transparency and monitoring of environmental impact by tracking how the funding is used for green initiatives. To enable this transparency, the requirements for issuance involve a rigorous review process including evaluating the business case for green bond issuance, undertaking environmental and social due diligence, creating a clear reporting framework, and KPI for project impact as well as verifying that there is sufficiently sound management and governance for the tracking and allocation of capital. Issuers are further encouraged to have a clear outline of the potential negative impact of the projects and a clear plan on how to mitigate such risks. The simple fund structure, independent monitoring (verified by a third party), and clear guidelines ensure that 100% of the funds from a green bond will be used for green initiatives.
The impact of climate change on the African market is significant given its already hot climate and significant reliance on agriculture. Green bonds have the potential to fund substantial investments in energy efficiency and renewable energy. This is especially important in Africa, where traditionally fossil fuels such as coal have been a mainstay for energy production and electricity supply infrastructure. With advances in green technology, we are seeing more focus on solar, geothermal, and wind power for grid-based renewable energy. Such investments could allow Africa to leapfrog the traditional use of fossil fuels for economic growth and instead rely on renewables for the bulk of their energy generation. Furthermore, there is the potential for improvements in environmental management, including sustainable farming and animal husbandry along with drip irrigation and reforestation. Such efforts could lead to reduced incidents of drought and hence higher crop yield. Other categories for potential green projects are improvements in energy efficiency; pollution prevention and control; efforts to increase aquatic biodiversity; clean transportation; improved water management and improvements in the reuse and recycling of products.
Thus, the use of a third party to verify clear criteria for green bond issuance, including strict requirements on capital allocation and reporting, allows for transparency and trust in a market with less political stability and financial sophistication. This ensures that capital can be used to fund a wide array of projects vital to allowing Africa to transition and support a renewable and climate-friendly economy.