Africa’s green bond market surges despite punishing financing costs

Africa’s green bond market, though still a fractional segment of the global total, is witnessing explosive growth as nations seek capital for climate-resilient projects, despite facing punishing borrowing costs reflective of the continent’s risk profile.

Though still a small player globally, the continent is showing signs of momentum as governments turn to climate-friendly debt to fund adaptation projects.

Last year, green bond issuances across Africa more than doubled, jumping 125% from the previous year, according to data from the Africa Policy Research Institute. That’s despite persistent barriers like high borrowing costs and a shortage of investor-ready projects.

In total, African issuers accounted for just $5 billion of the $2.2 trillion global green bond market in 2023. But analysts say the recent uptick should be treated as a shift and not necessarily a spike.

Investor activity is gaining remarkable momentum. Johannesburg pioneered African green bonds in 2014 with a $140 million municipal offering.

Nigeria followed as the first sovereign issuer with $30 million in 2017 and $41 million in 2019. The West African nation recently priced new green debt at 19 percent interest, with proceeds earmarked for renewable energy, eco-housing, and conservation projects.

East Africa entered the market through Kenyan developer Acorn Holdings, raising over $40 million in 2019 for sustainable student accommodation.

Tanzania’s CRDB Bank secured $300 million last year for renewable energy and water infrastructure, while Ivory Coast achieved the continent’s largest single issuance with a $1.5 billion offering.

The cost of capital remains a critical hurdle, with Nigeria’s 19% yield contrasting starkly with France’s 3 percent rate for equivalent green debt, according to France 24.

Market analysts attribute this punishing premium to currency volatility, persistent inflation, political uncertainty, and what Nairobi-based nonprofit FSD Africa identifies as “a shortage of bankable green projects.”

Governments must consequently offer substantial risk incentives to attract investors. These instruments function as sovereign bonds where proceeds exclusively fund environmental initiatives. Investors receive interest on loans directed toward clean energy, conservation, and other climate-aligned projects.

Credibility Concerns Shadow Expansion

Global green bond leadership remains concentrated with major polluters China and the United States as they fund energy transitions – a dynamic Nigerian environmental law expert Alex Oche notes is unsurprising “given that they are carbon-intensive economies who have contributed more in the global climate crisis.”

Still, Africa faces disproportionate climate impacts despite contributing just four percent of global emissions. Project integrity concerns persist among researchers who cite instances of “greenwashing.”

Razaq Fatai of Nigerian consultancy Vestance pointed to a reforestation project in Oyo state where exclusion of local communities allegedly caused mass sapling die-offs. “You end up wasting public resources while owing debt interest,” Fatai warned in an interview with France24.

Lagos law firm Udo Udoma & Belo-Osagie, which identifies Nigeria as a continental leader, stresses that unlocking Africa’s green bond potential demands “stronger regulatory frameworks, better project pipelines, capacity-building for issuers and enhanced investor confidence.”

The firm concluded with cautious optimism: “The future of green bonds in Africa and globally is promising, but it will depend heavily on credibility, innovation and inclusive growth.”

As climate pressures intensify, the continent’s ability to transform rapid market growth into verifiable environmental impact will face increasing scrutiny.

Meanwhile, emissions trading is increasingly becoming an effective market instrument for reducing emissions of CO2 and other greenhouse gases.

Businesses that cut their emissions can sell their excess carbon credits to other firms whose emissions have increased, thus commoditising carbon and creating a market.

It follows a historic deal at the UN climate talks in Baku last November that approved quality standards for carbon credits and cleared the path for a global carbon market to fund emissions-reduction projects.

The strategic shift follows high-level EU policy developments, including recent meetings between Econetix, EU Climate Commissioner Wopke Hoekstra, and Austrian Climate Minister Norbert Totschnig to formalise carbon removal markets under the EU’s 2040 framework.

The EU is preparing to operationalise its Carbon Removal Certification Framework (CRCF) as part of its roadmap to cut emissions by 90% by 2040, elevating permanent CO₂ removals from a theoretical side note to a central pillar of climate action.

In 2022, Kenya was looking to attract more than $2 billion worth of investments through the NIFC over the next eight years, with Nairobi now joining Casablanca (Morocco), Cape Town (South Africa), and Port Louis (Mauritius), and Johannesburg as IFCs on the continent.

NIFC CEO Oscar Njuguna has said he is upbeat about the potential for the carbon exchange to spur climate finance in Kenya by establishing a locally accessible marketplace for carbon offsets.

In that East African state, the companies lining up to utilise the carbon exchange include power generator KenGen, Koko Networks, Mumias, and other smaller companies and farmers.

“Investments in clean green infrastructure are fundamental to Kenya’s continued prosperity and growth,” said Jane Marriott OBE, British High Commissioner to Kenya.

ACX securitises carbon credits around market demand, allowing traders to gain exposure to an asset class as opposed to individual projects. Every token is backed by one tonne of CO2 equivalent (tCO2e) and the credit sits in the
Exchange’s Trust.

The Capital Market’s Authority chair Nick Nesbit told Business Hub the move was an opportunity to grow trust in the market and to build a culture of ESG (Environmental and Social Governance) amongst regional companies.

“We are driving trust utilising technology and trying to ensure really robust mechanisms to ensure that businesses abide by ESG in Kenya,” he said.

Kenya is among the top providers of climate finance in Africa alongside South Africa and Nigeria. The country’s first-ever green bonds were issued by Acorn Holdings in 2019. That issue was oversubscribed.