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Kenya banks on Sh87b sovereign green bonds

Fred Aminga and agencies @faminga

Kenya can tap green bonds opportunities worth Sh87 billion targeting the manufacturing, transport and agriculture sectors when the country eyes its first sovereign green bond next year.

According to a study commissioned by Green Bond Programme Kenya with support from Kenya Bankers Association and WWF Kenya, the opportunity which can be planned over the next five to 10 years, has a near-term demand for Sh16 billion.

Green bonds

Such green bonds are created to fund projects that have positive environmental and climate benefits. Proceeds from these bonds are earmarked for green projects but are backed by the issuer’s entire balance sheet.

Entitled Demand Study on Green Finance Opportunities, the report which was released yesterday quantifies the investment opportunity for green investments in Kenya, identifies barriers to the issuance of green bonds and solutions for creating bankable projects.

Speaking during the launch, Mohammed Awer, WWF Kenya Chief Executive Officer said the study, a first in the market, bridges the informational gap experienced by potential bond issuers and investors in the green financing market.

The report favours the three sectors as low-lying fruits that can assure Kenya’s sustainable economic development in line with the country’s green economy strategy and climate change policies.

In the short term, the transport sector offers the bulk of climate-smart opportunities and finance demand estimated at Sh8 billion annually,  growing to Sh58 billion in five to 10 years (medium term).

Agriculture offers Sh3.5 billion in the short term and Sh18 billion over 10 years while manufacturing with Sh4.4 billion and Sh10.7 billion respectively.

Taking cognisance of the planned light rail and rapid bus transit model in Nairobi and Mombasa which have a finance demand worth Sh14 billion and Sh35 billion will take the bulk of the sustainability investments available under transport sector in the short term.

Under the manufacturing sector, the study lists energy efficiency, renewable energy, agro-processing and waste management as potential areas for green investment. Livestock and agricultural inputs cap the opportunities in the agriculture sector.

“The study brings a clearer understanding of sector performance and investment trends for climate smart projects which in turn will help bond issuers and investors understand the market size, and estimate future financing potential,” said Awer.

The need for an enabling policy environment at local and international level, limited data on green investment opportunities and technical know-how have been cited as among key barriers hampering spread and scaling up of the green financing market in Kenya.

Challenges

To address these challenges, Kenya needs to ensure that green bonds have their proceeds invested in projects with environmental benefits, and mostly facilitate climate change mitigation and adaptation, as practised globally.

The research that which was conducted by SBA Consulting on behalf of the partners found that issuance of green bonds in the manufacturing sector is likely to be affected by potential issuers’ risk perception of greenfield projects, disenabling regulations, and limited technical skills.

The transport sector is affected by lack of an enabling environment at the national and county level. Access to capital and risk perception, fragmented smallholder farmer base and long payback periods impacts green investment in agriculture sector.

“The study recommends a raft of solutions that will help build a robust and viable pipeline of projects, create confidence for bond issuance, and call for improved enforcement and policy coherence,” said Jared Osoro, KBA Director of Research and Policy.

KBA, NSE, Climate Bonds Initiative (CBI) and Financial Sector Deepening Africa (FSD Africa) in conjunction with the FMO – Dutch Development Bank and the International Finance Corporation (IFC) launched Kenya’s Green Bond programme last year.

The programme, which is endorsed by the Central Bank of Kenya (CBK), Capital Markets Authority (CMA) and the National Treasury saw a Cooperation Agreement to support the development of a green bonds market in Kenya. FSD Africa committed $600,000 (Sh60 billion) to fund the programme with the objective of aiding KBA to tap the growing investor demand for green investments.

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