Clean energy projects have tended to dominate the green bond market
Jeffrey Gogo Climate
Zimbabwe has stepped into the fast growing market of investors seeking to do the environment good, announcing plans for its first green bond issuance of $200 million.
Now that’s according to an exclusive report carried by this paper earlier last week. Details remain sketchy, but indications are that banking group CBZ Holdings Ltd — the country’s biggest by deposits — will be the lead book-runners in an offer that aims to fund renewable energy.
About $140 million will help finance the construction of a 100 megawatt PV solar power plant at Gwanda in the country’s south-west, the report said. The remainder will go towards the building of a 30 megawatt hydro-electric plant along the Gairezi River in eastern Zimbabwe.
Whereas the thrust on renewable energy dovetails with Zimbabwe’s long-term energy plans under the National Energy Policy of 2012, as well as national greenhouse gas emissions targets under the Paris Climate Agreement, it is the manner of fund-raising that catches the eye.
To achieve its goal of a 33 percent reduction in emissions by 2030, mostly through increased investment in renewable energy and improvements in energy efficiency, the Zimbabwe Government has said it will need up to $55,8 billion in global finance, with only a small portion funded by Treasury, according to its climate plan under the Paris Agreement.
Until now, funding for projects in grid-electricity supply has tended to rely on bilateral country-to-country loan arrangements, including finance from global lenders such as the World Bank. And that’s all right. Large-scale power plants in hydro or thermal, and even solar, are for those whose pockets go deep enough.
Any developing nation faced with varying competing socio-economic needs could struggle to deliver the adequate amount of money necessary to keep the engines in industry running, and the lights on, in the home.
But never before has Zimbabwe as a sovereign borrower looked to selling debt to bankroll environment-centred projects.
Booming market
The green bond market works in the same way as conventional bonds, except they raise funds for environment-specific, but not necessarily climate-focused projects. An issuer comes to the market with an issue, states how much it is they want to borrow, and at what coupon, and the reasons for which they are borrowing. The market takes over after that.
Across the world, the market for green bonds has swelled to $72 billion at the end of 2016, according to Climate Bonds Initiative, a not-for-profit global organisation that tracks and mobilises climate-oriented bond issuances from around the world.
Ten years ago, when green bonds set in, only a few million dollars worth of debt was issued, in a market that has largely been dominated by private institutional borrowers from Europe and America.
But amid growing global effort at halting the emission of climate-changing gases in an effective, verifiable manner, world governments are only starting to catch on.
In Africa, Nigeria announced plans in May to issue up to $63 million of green debt, in a phased offering that aims to fund projects in renewable energy, agriculture and transport.
It is interesting that clean energy projects have tended to dominate the green bond market. That’s because the energy industry, as indicated by the run-away burning of fossil fuels to produce electricity or to provide fuel for cars and airplanes, is the biggest source of emissions worldwide, and that’s where most of the emission cuts are needed.
Here, energy accounts for 49 percent of the national greenhouse gas emissions total, according to data from the Climate Ministry.
New funding options
With its maiden green bond issuance Zimbabwe appears to be following a global pattern, but without extra legislative incentive to attract big money investors such like mutual, pension or insurance funds to invest into climate-centric projects, there is no telling whether local investors — who are the prime target — will be keen on such an issue. Unlike Nigeria which is targeting wealthy offshore investors for its issue, Zimbabwe is a little short on that luxury.
Most of its debt isn’t investment grade, a rating keenly followed by world investors. That means the energy bond will likely attract only those investors attracted to assets considered by many as risky, or junk, with a high default risk, even if its foreign capital that’s been hooked.
And with a debt overhang in excess of $6 billion, the country has already been finding it tough to seek new, cheap money to fund growth in sectors other than climate or the environment.
However, what the green bond offers is an expansion of the channels that are now available to Zimbabwe for raising climate-specific funds, seeing as it is overall public spending on such projects make up an insignificant one percent of total Government expenditure for 2017. And again, this is for self-interest.
As countries like the United States, the world’s second largest polluter after China, play poker with our future, refusing to fund green growth within the Green Climate Fund scope, the bond market is a viable option for raising money domestically, to help the Zimbabwe Government fulfil its share of pledges under the Paris Agreement.
The recent revival of the domestic bond market by authorities at the Zimbabwe Stock Exchange, allowing both companies and public entities to issue and trade debt, is also an opportunity to tap into local funds.
It could be here that the Government is looking to for its capital raising initiatives, targeting local pension funds and insurance companies who are reportedly sitting on $10 billion worth of assets, and are by law required to invest a minimum 15 percent of their money into public paper.
Whatever the outcome, Zimbabwe’s maiden green bond comes at a critical moment, when the country is seeking to ease two decades of severe power shortages, and to meet up with its greenhouse emission goals under the Paris Agreement, in part achieved through domestic spend.
God is faithful.