The burgeoning effects of climate change and the cost of extreme weather disasters grew by 86% between 2016 and 2017, according to the World Metrological Organization. “There have been rising calls to promote a type of finance known as ‘green finance’ as a proactive method to fulfil SDGs connected to environmental sustainability as part of global efforts to transition to a sustainable low carbon economy,” according to Prof. Nagwa Samak, Vice Dean of Post Graduate Studies and Research, Faculty of Economic and Political Science, Cairo University.
Green bonds are specifically destined for the funding or refunding of green projects, i.e. projects that are sustainable and socially responsible in areas such as renewable energy, energy efficiency, clean transportation or responsible waste management. However, to be eligible to issue those bonds; countries, companies or projects need to have a positive crediting rating, which is difficult for some countries in Africa, Divaldo Rezende, PhD. International expert in sustainable finance, climate change and carbon markets, told Egypt Oil & Gas.
As drivers of global climate financing, green bond issuance has surpassed $350 billion in Q3 2021. According to Minister of Finance Mohamed Maait, Egypt’s economic growth is attributed to sustainable investments. “In fact, green investments have reached around 30% of this year’s budget,” he said during The Egypt Petroleum Show (EGYPS 2022).
Egypt was the first to issue green bonds in Africa and the Middle East, where in September 2020, the Ministry of Finance (MoF) successfully issued the first sovereign green bond in Africa and MENA region for $750 million for 5-year maturity, which places Egypt on the map of sustainable financing, the Minister explained.
According to the Finance Minister, “In November 2021, the MoF made publicly available its first annual allocation and environmental impact report for the 15 national green projects that were financed through the proceeds of the green bonds. Of the total bond proceeds, 46% were allocated to green transportation projects and 54% to sustainable water and desalination management projects.”
In line with the MoF’s goals to diversify its resources, the Ministry issued its first green loan for an amount of $1.5 billion from a group of international and commercial banks, the minister further noted, adding that the issuance of the loan was met with a high level of demand.
The international expert in sustainable finance, climate change and carbon markets, told Egypt Oil & Gas, “Corporations are not the only ones pioneering sustainable debt – a growing number of governments are issuing their own debt instruments with a sustainable label, meaning that the money raised will be earmarked to go into environmental or social projects.”
“What we see in the market is that more investors in debt markets are demanding dual social and green benefits, and more investors are demanding customized sustainability options. The markets are responding, with new products emerging such as green loans, green commercial paper and sustainability-linked loans. This helped to make 2021 the seventh consecutive year of record issuance in sustainable finance since the green bond market began,” Rezende said.
“New policies to scale sustainable finance proliferated in 2018, as governments vied to become international hubs for these investment products. In the year, Hong Kong and Japan established programs to incentivize market growth, while developing countries could follow the same path,” Rezende said.
FRA green bond guidelines and framework
In July 2018, the Chairman of Egypt’s Financial Board Regulatory Authority announced approval to establish an article to regulate the issuance of Green Bonds and contribute to eco-friendly projects. Following the announcement, the Egyptian government established a Green Financing Framework, which will enable Egypt to finance existing and future eligible green projects.
“The sovereign green bond program will help us raise capital from investors who care for both environmental and financial returns,” said Finance Minister Maait. “The issuance of international government green bonds in the global markets will enhance the environmental rating of Egypt in addition to increasing the confidence of foreign investors in the Egyptian economy and supporting its current and future growth levels.”
According to the Green Financing Framework, which is in accordance with the 2018 ICMA Green Bond Principles10, and under which Egypt can issue Green Bond(s) or Sukuk(s), any amount equal to the net proceeds of any green bond/Sukuk issued by the Egypt will be allocated to finance new or re-finance existing projects/expenditures, in part or in full. Eligible expenditures will include any of which contributes to Egypt’s climate change mitigation and adaptation policies. In addition, eligible green projects will exclude any state disbursements to a local agency or local authority that participates in capital markets.
For each Green Bond/Sukuk issued, Egypt asserts that it will not use the proceeds for: Burning of fossil fuels for power generation and transportation; Rail infrastructure dedicated for the transportation of fossil fuels; Nuclear power generation; Alcohol, weapons, tobacco, gaming, or palm oil industries; Renewable energy projects generating energy from biomass using feedstock originating from protected areas; Waste incineration activities: waste to energy facilities that incinerate recyclable or reusable materials or that divert waste from other usage; Landfill projects.
Role of private sector
“Green finance is not the responsibility of one entity, yet it depends on collective action from various players, so it is a multi-layered process that involves banks, institutional investors, and international financial institutions, companies, production facilities, or even governmental authorities,” according to Vice Dean Samak.
Meanwhile, the sustainable finance, climate change and carbon markets expert Rezende explained “green bond issuance should be associated with other mechanisms like climate finance and sustainable finance. Climate finance from public sources of funding require that the project’s sponsor mobilize funding from other sources, including the private sector.”
“The private sector is key to mobilizing green investment and sustainable development, 75% of the investment is expected to come from the private sector to complement public sector financing. This calls for innovative approaches to attract and steer financial flows consistent with a pathway towards Green Bonds and climate resilient development. Climate Change Presents a $5 trillion investment opportunity in Africa by 2030,” Rezende added.