Africa’s GSS+ Bond Market Ripe for Growth

Despite development barriers, opportunities are emerging for investment in sustainable assets in growing market.  

Africa has seen rapid growth in issuance of green, social, sustainability and sustainability-linked (GSS+) bonds and could prove enticing to investors, in spite of existing challenges. 

There was a 14% issuance increase in the region 2022, outstripping the 6% growth in the global market, weakened by the widespread consequences of Russia’s invasion of Ukraine. The UN previously described the GSS bond market as a “new frontier that can help Africa build a deeper, resilient, and sustainable financing”. 

2023 may not see a bond boom like in 2021, which saw a 256% rise, with potential further interest rate hikes and global economic headwinds dampening growth of the market. But William Attwell, Associate Director at Sustainable Fitch, predicts there will be greater growth in GSS+ bonds in terms of issuance and “fruitful opportunities” to invest in assets that align with the UN Sustainable Development Goals (SDGs) 

Attwell authored Sustainable Fitch’s Africa’s Sustainable Finance Markets report which highlights that GSS+ bonds in the region face scalability challenges, with risks and capacity issues restricting the potential of this thematic debt market. However, it posits that there is still growing demand from ESG investors for sustainable assets which the Africa region can offer.  

Recent market activity includes the African Development Bank issuing an inaugural NOK 1 billion (US$93.9 million) green bond in the Norwegian market due March 2028. Late last year, the Emerging Africa Infrastructure Fund also issued the first ever green bond in Kenya, which saw KES 1.3 billion (US$12.7 million) used to create “clean, safe and affordable accommodation for 5,000 students. 

The African GSS+ bond market is currently dominated by South Africa, with 58% of issuances made by entities based in the country. The next four highest issuers are Nigeria and Morocco (7% respectively), and Namibia and Mauritius (6% respectively). Collectively, these four issuers account for less than half of issuances made by South Africa alone. South Africa is also an outlier as almost all domestic market GSS+ bonds were issued in rands, while entities in  other African countries issued in a mix of local currencies, dollars or euros. 

Fruitful SDG opportunities 

According to the report, Africa currently is “making limited progress towards the UN SDGs”. However, GSS+ bonds offer “promising opportunities” for action in in the region through the financing of projects offering multiple benefits, also enabling investors to align their portfolios with the SDGs.  

The report said that African governments and regulators are “aware that the rapid rise of ESG investing globally presents opportunities to attract much-needed foreign investment, often of favourable terms, to support socioeconomic development, climate resilience and other policy outcomes aligned with the SDGs”.  

This has seen regulators take steps to “facilitate growth” in sustainable finance in the region, which includes measures to “facilitate issuance of GSS+ debt and create greater certainty and confidence for asset managers and owners”. 

According to Attwell, the number of labelled instruments being issued is growing “very rapidly”, and for ESG investors looking to have an outsized impact, “Africa is a region where you where you can certainly find those opportunities”.  

Use of proceed bonds issued in Africa in recent years have been used to finance activities and projects aligned to the SDGs. This includes climate action, energy efficiency, access to affordable energy, addressing poverty and social development issues, which Attwell cites as “evidence of financing flowing towards projects and activities that address those needs”. 

The report spotlighted the issuance of bonds by Tanzanian and Togolese banks to finance access to ‘essential services’ and ‘affordable infrastructure use of proceeds that correspond with SDGs, including SDG 1 (no poverty), and SDG 7 (affordable and clean energy). 

Benin’s €500 million sovereign green bond issued in 2021 was labelled as an SDG bond, which Attwell said had “quite an extensive laundry list of activities and projects that addressed a wide range of SDGs” that international financing helped to support, which was put together with close assistance from the International Finance Corporation (IFC). 

The IFC, part of the World Bank Group, has worked very closely with financial regulators, stock exchanges, and African governments in helping them to put together necessary green bond guidelines, listing rules and other policy instruments to help to facilitate and incentivise issuance of green debt.  

There are “very specific initiatives that are pushing this and those have borne fruit,” said Attwell. “We’ve had issuance of green bonds in markets that haven’t had them before.” 

Morocco’s capital markets authority, the L’Autorité Marocaine du Marché des Capitaux, collaborated with the IFC to develop an initial set of green bond guidelines in 2016, which were later updatedto include guidelines for social and sustainability bonds. The Ghana Stock Exchange and the Securities and Exchange Commission created rules for green bonds and sustainability-linked bonds in November 2022, which were developed with support from the IFC. 

Sustainability-linked surpassing social 

“Africa shows some different trends to what we see at a global level,” said Attwell. “Generally green bonds are the most common label and that’s the same in Africa. But in terms of the second most common label in in Africa, it’s been sustainability bonds or sustainability-linked bonds, whereas at a global level, it’s been social bonds.” 

Sustainability-linked debt is increasingly a popular format in Africa, with issuance coming from retail companies and automotive firms, compared to use of proceeds bonds like green bonds that tend to be focused on the financial sector issuers such as banks and real estate investment trusts. 

“Part of the reason sustainability-linked debt has been relatively popular has to do with the more commodity-dependent nature of a lot of African economies. We’re talking about heavy emitting industries,” Attwell said. “The use of proceeds bonds restrict what the proceeds can be used for”.  

This is “potentially not as attractive” for certain industries in terms of how the financing limitations would fit with their business needs, said Attwell, underlining the “greater flexibility that you get from a sustainability linked instrument”.  

“Hardly any social bonds were issued by African entities in 2022, which I think is kind of an interesting distinguishing feature,” he added, with social and sustainable bonds accounting for a combined 7%, trailing behind green (83%) and sustainability-linked (10%) issuance.   

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