NAIROBI, Kenya, April 30 – The Capital Markets Authority has released a soundness report discussing sustainable financing in capital markets that highlights emerging trends and opportunities in the industry.
The soundness report notes that adoption rates were mostly driven by clients’ desire to make an impact through sustainable economic activities and projects.
The number of sustainability-themed funds tripled between 2010 and 2020.
Assets under management (AUM) increased (quadrupled) between 2015 and 2020, rising from $900 billion in 2019 to over $1.7 trillion in 2020, representing 3.3 percent of the assets of all open-ended funds worldwide.
Speaking during the launch of the soundness report, the Chief Executive of CMA Wyckliffe Shamiah mentioned that the global economy continued to struggle from the escalating Russia-Ukraine crisis and uncertainty on interest rate hikes across the developed world in 2023.
“The board of the Capital Market Authority remains very committed in supporting effective implementation of the government’s bottom up economic print and the authority is keen in supporting the industry to achieve the national development agenda,” he said.
When making investment decisions in the financial industry, sustainable financing takes into account environmental, social, and governance (ESG) factors, which encourages longer-term investments in sustainable economic activities and projects.
ESG methodology has been projected to increase twofold in 2023 among small and midsize organizations until it reaches parity across organizations of all sizes, according to the International Foundation for Science (IFS).
The sustainable bond market includes green, social, sustainability, and mixed-sustainability bonds. Green bonds represent the largest portion (64 percent) of sustainable bonds.
Partly facilitated by stock exchanges—the Luxembourg Stock Exchange was among the first to list green bonds.
“Kenya should leverage its recent success in the green bonds space to explore and ultimately introduce other sustainability linked products such as social bonds and gender bonds,” said Luke Ombara, Director, Policy and Market Development.
“Due to increased costs associated with structuring products such as Green bonds, Kenya should focus on skilling local professionals on the various ESG related competencies such as ESG verification thus tackling the more diverse challenges faced in the country in relation to unemployment, inadequacy of health infrastructure and lack of proper housing amongst other social concerns, in line with BeTA.”
Social bonds were mostly catalyzed by the Covid-19 pandemic, with their issuance increasing by 900 percent in 2020.
CMA notes that the African Development Bank issued a $3 billion dollar-denominated bond to fight against COVID-19, which was significantly oversubscribed.
Economic growth is projected at 2.6 percent and 2.9 percent trend rates in 2023 and 2024, with the Russia-Ukraine crisis continuing to present the top global economic risk, whereas recent bank collapses and rescue deals re-ignited concerns about global economic recovery.
Africa’s average growth in domestic product is projected at 4 percent in 2023 and 2024 and will outperform the rest of the world.
The soundness report highlighted that investors oversubscribed Egypt’s first Islamic bond issue by $6.1 billion against an initial booking of $1.5 billion. Morocco successfully floated two bond offerings worth $2.5 billion.
“On the brighter side, it is worth noting that during the quarter, African economies registered modest economic resilience despite macroeconomic headwinds. Over the next two years, the continent is set to surpass the rest of the world’s economic growth, with an average real gross domestic product (GDP) of approximately 4% in 2023. This rate is higher than the projected global averages highlighted above,” said Wyckliffe Shamiah, CEO CMA.
The authority listed some of the risks capital markets in Kenya might experience, including interest rate hikes that have continually scared away foreign investors, leading to others exiting the market, thus extending the bear run at the NSE.
However, there is hope for Kenya as the joint capital markets industry’s (CMA, NSE, CDSC, KASIB, and FMA) technology driven strategy will increase domestic investor participation and reduce dependence on foreign investors.
CMA suggested that some level of oversight is required for private markets and platforms where unlisted securities trade, given the transmission risks that they pose to the public markets and overall financial stability.
