Since the issue of the first green bonds by the European Investment Bank (EIB) in 2007, the market has grown exponentially, with a projected issuance of $200 billion in 2018 from $155 billion in 20171. The rapid growth of the international green bonds market is demonstrating how the capital market can be utilised as a mechanism to address the consequences of global environmental and climate change. Green bonds can also be particularly attractive to investors that are looking for corporate social responsibility opportunities, in line with global best practice, which have not been available via fixed income investments till date.
Green bonds are fixed income securities that are issued to finance or refinance environment and climate beneficial projects (green projects), such as renewable energy, waste management and pollution prevention projects. The structure of a green bond transaction is very similar to that of a traditional bond. The difference, however, lies in the application of the proceeds and the auditing and reporting requirements.
Issuance of green bonds has been largely driven by corporations and parastatals, with Poland being the first country to issue a sovereign green bond in December 2016. Since then, countries such as France, Fiji, and Canada have followed suit. Nigeria recently became the first African country (fourth globally) to issue a sovereign green bond. The N10.69 Billion, 5 Year Fixed Rate (13.48%) FGN Green Bond due 2022, issued on 20 December 2017, is the first Climate Bonds Certified sovereign bond2 and is to be used to finance Nigeria's afforestation program, provision of renewable energy micro-utilities in 45 communities and energizing education projects under the 2017 Appropriation Act. In addition, the green bonds were also assigned a GB1 (excellent) rating by Moody's Investors Service, a global credit rating company3.
Investors in green bonds, are presented with an opportunity to invest in initiatives that contribute to sustainable development and protect the environment and the community at large. The resultant effect is improvement in the lives and welfare of the people living within rural areas, where the green projects are undertaken; due to job creation and improved efficiency of production that translates into greater economic returns.
Furthermore, the rigorous reporting standards structured to disclose the environmental impact of the green projects, ensure greater transparency with respect to the application of proceeds of the green bonds.
To provide effective regulation and oversight in the issue of green bonds targeted at the Nigerian market, Nigeria's Federal Ministry of Environment issued the Green Bond Guidelines (GBG)4. The GBG has four components, these are use of proceeds, project eligibility, management of proceeds and reporting. The objective is to ensure that funds raised are channelled towards activities that complement the nationally determined contributions (NDC)5; provide issuers with requirements in issuing a green bond; and aid investors and underwriters through effective disclosures that ensure transparency and minimise information asymmetries.
It is however important that tax incentives are introduced to help drive the market. As it stands, Section 33 of the Personal Income Tax Amendment Act 2011 (PITA)6 exempts from personal income tax, bonds issued by Federal, State and Local governments and their agencies; bonds issued by corporate and supra-nationals, and interest earned by holders of these bonds and securities. The Companies Income Tax (Exemption of Bonds and Short-Term Government Securities) Order 2011 (CITA Gazette)7 also grants exemption to companies on their trading income, from corporate and government bonds, treasury bills and other short-term securities. However, the exemptions under the CITA Gazette are for a period of ten years - ending January 2022. It is unclear if the Federal Government will revisit the exemption upon the expiration of the stated term. Perhaps the Federal Government may consider the introduction of tax policies targeted at green bonds.
The introduction of green bonds into the Nigerian capital market provides an alternative means of financing capital intensive green infrastructure projects. This presents opportunities to fund solutions to environmental issues that affect governments, corporations, and investors. Furthermore, it provides a platform through which Nigeria can fulfil her commitments under the Paris Agreement.
1 Global green bond issuance expected to spike by 30% in 2018: S&P Global Ratings
2 Andrew Whiley, "Nigeria Issues Climate Bonds Certified Sovereign Green Bond: Signals 'more to come' as part of Paris NDC objectives" (Climate Bonds Initiative, 19 December 2017) www.climatebonds.net/2017/12/nigeria-issues-climate-bonds-certified-sovereign-green-bond-signals-%E2%80%98more-come%E2%80%99-part-paris, accessed 20 April, 2018. An external review was conducted by the Climate Bonds Standard Board in respect of Nigeria's N10.69 Billion green bond issue and a certificate was issued certifying that the transaction framework and use of proceeds is in line with its defined assessment standard.
3 Global Credit Research, "Moody's Investors Service Assigns GB1 (Excellent) Green Bond Assessment to the Government of Nigeria's Green Notes" (Moody's Investors Service, 13 December 2017) www.moodys.com/research/Moodys-Investors-Service-Assigns-GB1-Excellent-Green-Bond-Assessment-to--PR_375611, accessed on 20 April, 2018.
4 Issued in November 2016, the GBG draws from the International Capital Market Association's (ICMA) Green Bond Principles.
5 According to United Nations Framework Convention on Climate Change, the NDC "embody efforts by each country to reduce national emissions and adapt to the impacts of climate change. The Paris Agreement (Article 4, paragraph 2) requires each Party to prepare, communicate and maintain successive nationally determined contributions (NDCs) that it intends to achieve. Parties shall pursue domestic mitigation measures, with the aim of achieving the objectives of such contributions." See United Nations Framework Convention on Climate Change, "Nationally Determined Contributions (NDCs)" www.unfccc.int/process-and-meetings/the-paris-agreement/nationally-determined-contributions-ndcs, accessed 20 April, 2018.
6 Personal Income Tax Amendment Act 2011 (PITA)
7 The Companies Income Tax (Exemption of Bonds and Short-Term Government Securities) Order, 2011 – Federal Republic of Nigeria Official Gazette No 26, Vol. 99 dated January 2, 2012.
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