The United Nations Economic Commission for Africa (ECA) and the World Bank jointly organized a virtual workshop on the development of the GSS (Green, Social and Sustainable) sovereign bond market in Africa on 19 July 2022.
Countries across Africa need innovative financing solutions to achieve their ambitious climate goals and meet Paris Agreement commitments. In the context of prudent debt management, GSS bonds can form a central part of the financing strategy for sovereign and subnational entities to finance both mitigation and adaptation investments.
Hanan Morsy, ECA Deputy Executive Secretary, said: “Ahead of this year's COP27 in Egypt, Africa faces a mixed environment for achieving climate ambitions and NDCs. We urgently need the pledge of $100 billion a year to be met, while we need a new funding target that mobilizes the trillions needed. GSS bonds play a vital role in leveraging resources in international capital markets to unlock the potential of the green and blue economy in Africa. The ECA supports Member States through various initiatives, such as the Great Blue Wall, the Liquidity and Sustainability Facility and debt-for-nature swaps, to break away from aid dependence by using market-based innovative financial instruments.
Global GSS debt issuance will reach $1.6 trillion in 2021. This was more than double the level in 2020, indicating an increase in investor interest. However, Africa is not yet reaping the full benefits of the market.
"Fewer than 50 thematic bonds have ever been issued across Africa, and only five of these have been sovereign. Sustainable financing, combined with sound debt management, is a strategic way to raise the necessary funds to respond to the pandemic in a way that is also resilient. Release the potential for GSS sovereign bonds in Africa can only be realized by clarifying market expectations and bridging the knowledge gap. The World Bank, in coordination with ECA, is working on a capacity-building program to support clients in the region that will illuminate opportunities for the development of the GSS market." said Jorge Familiar, World Bank Vice President and Treasurer.
Jean-Paul Adam, Director of the Technology, Climate Change and Natural Resources Division at ECA, said: “Africa is facing many challenges posed by the COVID19 pandemic, climate change and the recent crisis in Ukraine. While the ability to mobilize predictable grant resources from traditional concessional funding remains a critical element in addressing these challenges, the private sector can also play a beneficial role in bridging funding gaps. Africa currently pays more than double the price of countries with similar macroeconomic fundamentals. There is a need to provide Africa with affordable and stable sustainable finance, as sustainable financial markets are essential to addressing "Africa's ambitions and achieving Agenda 2063 and Agenda 2030". "
There is very strong interest from potential sovereign issuers of GSS bonds. In a recent World Bank Treasury survey of emerging market debt management authorities and international investors in all regions, more than 75 percent of DMOs intend to issue GSS bonds. These DMOs saw strong potential benefits of using the GSS bond market to diversify the investor base, signal commitment to sustainability, build a local market to motivate private sector issuers and attract international investors. International investors highlighted several reasons for their interest in thematic bonds, including achieving ESG impact, developing the thematic bond market, diversifying their portfolios and serving the direct business interests of their investors and shareholders. Surveys show a strong consensus among issuers and investors that thematic bonds can be essential instruments for financing the large-scale investments needed to meet NDC and SDG ambitions.
"There is a large potential opportunity for sovereigns to capitalize on investor demand for GSS assets both internationally and domestically. However, there are challenges cited by DMOs in issuing GSS bonds, including understanding the principles and standards for GSS bonds, the cost and complexity of the issuance process, and difficulties in identifying eligible spending and projects. There are currently strong headwinds for emerging markets in capital markets, but this may provide time to prepare and build capacity when the time is right to issue GSS bonds," said James Seward, Chief Financial Officer of the World Bank's Treasury Department .
During the workshop, technicians discussed the importance of raising awareness and exploring the potential issuance of GSS bonds in Africa by sovereign issuers or sub-national entities. The panel focused on practical experience with issuing GSS bonds, challenges and solutions for developing successful GSS bond programs. The panelists also discussed new market trends such as the issuance of inflation-linked green bonds from France and the issuance of double green bonds in local currency in Colombia. Finally, participants shared practical experiences and lessons learned from the recent Egyptian Green Bond and Benin SDG Bond and plans for future issuances by the panelists.
The World Bank and the European Court of Auditors thanked all participants for their contribution and involvement during the workshop.
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