Global investors are set to ride a new wave of emerging-market related debt that tackles the growing sustainable needs of developing nations.
As an emerging market leader in the Middle East and North Africa (MENA) region, Egypt is leading the way as it looks to tap foreign investors’ appetite for green-related debt offerings.
While the size of Egypt’s green bond, announced by the Egypt Finance Ministry earlier this year, is unknown, we do know that its proceeds will relate to the broader economic national program, specifically linked to its Environment, Social, and Governance (ESG) agenda1.
The move follows reforms, including the 2016 currency devaluation and a three-year US$12 billion International Monetary Fund (IMF) loan, which has seen Egypt’s government focus on balancing their books and attracting investment from both the private and public sectors.
Green bonds have emerged as a viable and popular financing mechanism. These instruments are effectively conventional bonds with an environmental twist, as they can only be deployed for initiatives that either reduce carbon pollution or combat it.
Earlier this year, the Egyptian Financial Regulatory Authority said it is finalising a framework to facilitate the issuance of green bonds2. Egypt is hoping to raise funds to invest in infrastructure and services for a booming population that reached 100 million earlier this year, according to the Central Agency for Public Mobilization and Statistics, the country’s statistics agency. The United Nations expects the country’s population to reach nearly 160 million by 20503.
The country’s economic growth, which has been revised down to 4.1% from 5.6% previously for the 2019/2020 fiscal year (ending June 30) due to the impact of COVID-19, requires more financing instruments to fund the next wave of projects.4
In a booming green bond market, ESG is outperforming
Green financing has taken the world by storm. From a modest US$46 billion in green bond issuances in 2015, the industry has exploded with just under US$250 billion financed in 2019, according to think-tank Climate Bonds Initiative (CBI).5
An Environmental Finance Bond Database shows HSBC was the leading green bond manager in 2019, raising US$14.82 billion last year. It was also ranked first in sustainability bond lead managers globally, with US$3.86 billion.6
“The Egyptian government sees green bonds as a key part of its efforts to tap the wider international bond market and finance its ambitious growth agenda. Purpose-lead investing has been on the rise and it’s outperforming globally,” says Helmy Ghazi, Managing Director and Head of Global Banking, HSBC Egypt.
HSBC Research globally analyses 613 shares of global public companies valued over USD 500 million, where climate solutions generated at least 10 per cent of revenues, in addition to 140 stocks with the highest ESG scores and values.
We looked at performance from 10 December, 2019, to 23 March 2020, which ranges from the start of the COVID-19 crisis to when global volatility began.7 The climate-focused stocks outperformed others by 7.6 per cent from December and by 3 per cent since February. ESG shares beat others by about 7 per cent for both periods.8
ESG financing bolsters transformation
Egypt’s green bond debut also dovetails with the country’s Sustainable Development Strategy: Egypt Vision 2030, which envisions a greater role for the renewable energy sector in Egypt’s energy mix . By 2030, Egypt aims to increase solar and wind-powered electricity production to account for 30% of the total, compared to 1% currently.
Vision 2030 pictures an energy sector that will meet the national sustainable development requirements and ensure conventional and renewable resources contribute to economic growth and environment preservation.
“Despite the current uncertainly seen by COVID-19 we are witnessing an increased interest for sustainable financing, as Egypt and the wider region seeks to transform,” concluded Ghazi.