Assessing FMDQ’s Green Finance Initiatives

The impact report of the Green Bond Market Development Program (NGBMDP) shows that the initiatives championed by FMDQ Group and other partners to establish a green bond market in Nigeria are yielding desired results, writes Goddy Egene

After the adoption of the Paris Agreement by 196 countries on 12 December, 2015 many countries began striving to keep to the terms of the agreement. The Paris Agreement calls for keeping the global temperature to 1.5 ° C above pre-industrial era levels. Nigeria ratified the agreement in 2017. It is estimated that over $ 60.00 trillion is required to achieve the Paris Agreement from now until 2050.

And the green bond market is a major source of funding required for the shift to a low carbon economy in line with the goals of the Paris Agreement.

Green bonds seek to reduce this pressure on the environment by addressing green-house gas emissions, tackling pollution, minimizing waste, and improving efficiency in the use of natural resources.

In order to ensure that Nigeria begins the journey of fulfilling the terms of the Paris Agreement after signing in 2017, the Green Bond Market Development Program (NGBMDP) was launched in June 2018.

The NGBMP was launched after a series of feasibility studies. Consequently, FMDQ Group, Climate Bonds Initiative (CBI) and FSD Africa formalized a partnership through the execution of a three-year Cooperation Agreement to support the development of the Nigerian green bond market. The NGBMDP was launched at a time when arguments for economic diversification had taken center stage and most African countries were seeking to align their economies to take advantage of opportunities within the green finance space. FMDQ Group serves as the secretariat of the program and the appointed project manager that oversees the implementing activities, convenes meetings, organizes workshops, and provides administrative coordination of events.

Prior to the launch of the NGBMDP in 2018, Nigeria issued its first sovereign green bond in December 2017, signaling the government’s green

intentions in meeting its National Determined Contributions (NDCs) to reduce CO2 emissions in line with the Paris Agreement. This issuance was a watershed moment for the country as this was the first ever sovereign green bond certified against the Climate Bonds Standards and Certification Scheme. The proceeds from the five-year, N10.69 billion, was used to finance renewable energy (Rooftop Solar) and afforestation projects.

However, the NGMDP strategy presented an approach to accelerate the development of green bonds as a tool for Nigeria to broaden investment in green projects and assets.

Some of the program’s key features include regulatory support for the development of guidelines and listing requirements for green bonds, developing a pool of local green bonds licensed verifiers, training and supporting demonstration transactions.

In developing the corporate and non-sovereign green bond market, the

partners of the program implemented five key strategic workstreams: facilitate the establishment and development of a green bond market; support the development of guidelines and listing requirements for green bonds; develop a pool of Nigeria-based licensed verifiers to support issuers; develop a pipeline of green investments and facilitate engagement with potential investors and support broader debt capital markets reforms that have an impact on the non-government bond market in Nigeria.

In its impact report, the NGMDP has, over the last three years, made considerable strides towards developing the market and supporting green bond issuances at both sovereign and corporate levels in Nigeria.

Through the program’s support, N47.82 billion has been raised through the issuance of green bonds in Nigeria, over five hundred 500 capital markets professionals have been trained and five green issuers have been provided technical assistance to support their issuances among others.

Another key success is the support the program provided to FMDQ Group on the launch of the Green Exchange in November 2021.

FMDQ Green Exchange is an information platform dedicated to

promoting transparency, good governance, and the growth of green and sustainable finance in the Nigerian financial markets by showcasing sustainability-linked capital raising activities (securities issuances) that align with global ESG.

In the spirit of continuous improvement, FMDQ Group, as the local partner, continues to educate capital market intermediaries and issuers on the importance of the ESG Impact Reports and disclosures through the use of the United Nations (UN) Sustainable Development Goals (SDGs), which is used to identify sustainability issues and demonstrate the company’s contribution to the global initiative.

FMDQ Group periodically monitors the issuances and, on an annual basis, requests the submission of the issuers ’Impact Reports and Independent Assurance Reports. Additionally, issuers of corporate green bonds are also required to render a Quarterly Compliance Report within 10 business days of the end of each quarter.

Issuers are also required to provide updated Issue / Issuer rating reports, as may be required from time to time. These disclosures are published on the FMDQ Securities Exchange Limited website.

The issuers fulfil these requirements through their sponsors to list these securities, which are Members of FMDQ Securities Exchange Limited under the Registration Member (Listings) category.

However, before the launch of the FMDQ Green Exchange, the group entered into a three-year partnership with FSD Africa and CBI to develop the Nigerian green bond market (2018 – 2021). This partnership is now renewed with only FSD Africa for 2022 to 2025.

FMDQ Group has listed two sovereign and four corporate green bonds, with a total value of N58.51 billion.

It has signed a memorandum of understanding (MoU) with the Lagos State Government and FSD Africa to facilitate the issuance of the maiden N25.00 billion green bond and other sustainability linked debt securities (September 2021).

The group has executed over 20 training / capacity building sessions, directly impacting 976 stakeholders. The last session was held on March 18, 2022, for the Lagos State Government.

Given the progress made within the first three years of the program, it is very obvious that the future of the green bonds market is very bright. Besides, the benefits of green bonds are capable of attracting more patronage.

Green bonds are important because they are financial innovation instruments designed to facilitate sustainable investing for institutional investors such as pension fund administrators (PFAs), insurance companies and funds / asset managers. Green bonds are viewed as being pivotal to the growth of sustainable infrastructure investments from institutional investors by improving the liquidity of infrastructure assets.

Green bonds comply with regulation, invest in sustainable products and initiatives without taking on additional risk. They develop better-informed investment strategies; broaden restricted investment portfolios; increase investor demand and diversification; improve relationships with debt providers; strengthen issuers’ leadership; enhance issuers’ reputation and brand value; help communicate issuers’ sustainability narrative and strategies; boost integration between finance and sustainability teams; stimulate positive stock market reaction and improvements in financial performance; foster green innovations; help transition towards low-carbon and resource-efficient economies; contribute to public-private-partnerships development opportunities and facilitate the implementation of climate policies.

Also, the Green Bond Principles (GBP), which are voluntary guidelines set out by the International Capital Markets Association (ICMA) to encourage transparency and disclosure and promote integrity have facilitated the development of the green bond market.

The GBP are intended for broad use by the market and they provide issuers with guidance on the key components involved in launching a credible green bond. They aid investors by promoting the availability of information necessary to assess the environmental impact of their green bond investments; and they assist underwriters by moving the market towards expected disclosures that will facilitate transactions.

As a direct result of the NGBMDP’s advocacy on climate change, key stakeholders in Nigeria, especially financial institutions, have become more aware of the climate-related financial risks associated with their business due to the exposure of their ‘loan book’ portfolio to high polluting sectors such as oil and gas.

On the flip side, there are ample opportunities for green financing in several sectors of the Nigerian economy, ranging from power and energy to agriculture, housing, and transportation, amongst others.

The NGBMDP has provided a framework on green finance to support the private sector in mainstreaming sustainability into finance and investment opportunities.

However, for the program’s advocacy to be more impactful on the Nigerian economy and produce the desired levels of private sector issuance and green investments, it must connect directly with representatives of the Ministries, Departments & Agencies (MDAs) of government responsible for developing the pipeline. of green projects for the sovereign issuance.

The absence of a large pipeline of green or sustainable projects despite the demand is a clear gap that needs to be addressed to facilitate coordination and capacity between the ministries.

NGBMDP must educate more potential issuers on the benefits of

labeling and financing green projects especially where the extra efforts and marginal added costs do not immediately translate into a pricing

benefit.

The program must work with Development Finance Institutions

(DFIs) and the Central Bank of Nigeria to inject concessional capital into the system to reduce funding costs for local banks. It must encourage banks to focus on green bonds as a risk management tool for greening the loan book and mitigating future exposure to potential stranded assets by reducing capital allocation to brown assets using portfolio reviews support for risk management mechanisms, such as guarantee structures, aggregation structures for small projects, and microloan products that can stimulate private sector participation.

The program should collaborate with the regulators and Exchanges

to periodically mandate the disclosure and transparency of carbon footprints as a prerequisite for access to green finance, and / or

encourage innovative financial products through incentives

It should establish or support a project preparation facility such as the Climate Finance Accelerator (CFA) to catalyze early-stage projects and small local developers to scale to a size that is commercially bankable and attractive to institutional investors.

It must provide technical assistance and capacity building for renewable energy projects (off-grid and grid connected) and develop more technical specialized knowledge of sustainable farming practices, including adopting climate smart agriculture (CSA) practices

Aside from green bonds, other innovative financing solutions will need to be created to finance the transition to a low-carbon

economy. These include green loans, green commercial papers and sustainability-linked instruments. Green financing instruments have a

necessity if Nigeria is to meet its commitment to the global agenda for sustainable finance for its own long-term economic resilience.

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