BUSINESS FOCUS WITH BALEWA ZYUULU

GREEN BOND OPPORTUNITIES IN ZAMBIA

In the 2023 National budget, the Government provided an exemption from withholding tax interest income earned on green bonds listed on the securities exchange in Zambia with a maturity of at least 3 years to encourage investment in projects with environmental benefits.

This move was a green light to green investments in the country and presents huge opportunities for those interested in investing in green bonds. Environmental Sustainability is one of the four strategic development areas of Zambia’s Eighth National Development Plan. This new incentive signals to investors home and abroad that green businesses will get the support they require to flourish.

In this week’s Business Focus, we shall focus our discussion around the available opportunities in the Green Bond Market in Zambia.

What are Green Bonds?

Green bonds are a type of fixed-income security designed to raise capital for projects that have positive environmental or climate benefits (Luo, Wang, & Zhu, 2021). With the increasing awareness of climate change, green bonds have emerged as an innovative and effective way to finance projects that aim to reduce greenhouse gas emissions, promote sustainable energy, and support the transition to a low-carbon economy (Climate Bonds Initiative, 2021).

Since the tax regime on bonds was that interest income earned by investors on plain vanilla bonds attracted a 15% withholding tax, the move by the government to exempt the 15% withholding tax on interest income earned on green bonds benefits the supply side of green bonds. Investors (suppliers of credit) pay no withholding tax on their interest income. It made the green bonds much more attractive to investors compared to regular bonds, which incur taxes.

In February,2023, President Hakainde Hichilema launched the inaugural Capital markets Master plan.

This plan is a comprehensive long-term strategy which sets out the primary framework for Zambia’s Capital Markets development over the next decade.

It is an important tool that seeks to organize various actors in a manner that will be convincing, for holders of the capital to consider Zambia as a choice destination for investments.

For President Hichilema, whose aspiration is to see Zambia become a financial hub that would attract financing including Green Bonds, said, the Master Plan focuses on improving the traditional security markets which include the stock market, corporate bonds market and collective investment schemes.

“I am optimistic that the launch of the master plan signals our resolve to set in motion the necessary interventions required to fully develop our Capital Markets as they are essential for creating employment opportunities for our youth, enhanced access to capital for small and medium enterprises, and facilitate our transition to a green growth economy,” President Hichilema said.

He said the Master Plan would ensure that Zambia is an attractive destination to not only local, but also foreign investors.

 “The plan aims at enhancing the Government Bond Market by implementing measures aimed at improving market operations. As a government, we have also realized that borrowing too much from the domestic market stifles the required capital for private sector growth,” he stated.

Green Bonds are key in fostering economic transformation

According to Policy Monitoring and Research Centre (PMRC) Executive Director Sydney Mwamba Green bonds have gained popularity globally in recent years due to increased concern about climate change and the need to transition to a low-carbon economy.

Mwamba said green bonds can play a key role in driving Zambia’s economic transformation while addressing environmental challenges.

“The country’s economy is heavily dependent on copper mining, which accounts for over 70% of export earnings. However, the mining sector is associated with significant environmental impacts, including land degradation, water pollution, and greenhouse gas emissions,” he said.

Mwamba further stressed that Green bonds can help finance projects that aim to reduce these negative impacts while supporting sustainable economic growth.

Mwamba was certain that Green bonds offered a promising opportunity for Zambia to finance sustainable development projects that can mitigate the impacts of climate change.

 “While there are several challenges that must be addressed to unlock the full potential of green bonds in Zambia, including regulatory harmonization, the limited availability of suitable projects, building capacity and expertise in green bond issuance and investment, and limited awareness and capacity among investors and issuers, there are significant opportunities as well.” he said.

Further, Mwamba said green bonds could support the growth of other sectors of the economy, such as agriculture and tourism, which were also vulnerable to the effects of climate change.

“For instance, green bonds can finance the development of climate-resilient agricultural practices, such as sustainable land management, crop diversification, and irrigation systems, which can increase productivity and reduce the impacts of extreme weather events. Similarly, green bonds can help finance the conservation and restoration of natural habitats, such as national parks and wildlife reserves, which are critical for the country’s tourism industry” Mwamba explained.

UK Foreign Secretary James Cleverly’s visit to Zambia recently, marked a significant milestone in strengthening UK-Zambia ties. The UK committed to generate up to £2.5 billion in private-sector funding from British companies, which will be channeled into Zambia’s mining, minerals, and renewable energy sectors.

Additionally, up to £500 million in UK government-backed investments and up to £150 million of private sector funding for small- to medium-sized enterprises (SMEs) will be mobilised, driving economic prosperity in both countries.

This is positive to foster positive growth for Zambia as the visited culminated into the unveiling of a UK-Zambia Green Growth Compact, a great strategic initiative to bolster green investment in Zambia’s economy. This partnership is poised to combat climate change, create job opportunities and stimulate business growth in both nations.

Why invest in a green bond?

With the above ripe environment for investments, you now have no excuse not to invest in Green Bonds. The reason is, Green bonds can help you (the investor) to put your money where their values are. Much like investing in environmental, social and governance, investments, green bonds have a mission built into the investment itself. Green bonds can also have tax incentives in the form of tax exemption and tax credits. Green bonds could be a great investment choice if you have a lump sum saved and want to contribute to something positive.

According to a report by the United Nations Development Programme, green bonds can play a significant role in financing sustainable development in developing countries like Zambia (UNDP, 2018). Furthermore, Zambia’s abundant natural resources and potential for renewable energy make it an ideal candidate for green bond financing (UNDP, 2021).

Access to a Larger Pool of Investors through the African Continental Free Trade Area: by participating in the African Continental Free Trade Area, Zambia can access a larger pool of investors and expand the market for its green bonds.

Nevertheless, when making the decision, you will need to consider the terms and conditions carefully, as bonds often restrict your access to your cash for the agreed period of the term.        

How can Zambians and investors gain access to Green Bonds?

You can gain access to green bonds through various options. One way is by investing in funds that specialize in green bonds, such as the Liontrust Sustainable Future Corporate Bond Fund and the Mirova Global Green Bond Fund. Another way is by directly investing in green bonds issued by various companies or the Government.

The Securities and Exchange Commission (SEC) developed guidelines for the issuance of green bonds, which provides a framework for companies seeking to issue such bonds.

By leveraging these opportunities, you can attract long-term financing for sustainable projects and contribute to the global effort to mitigate the impacts of climate change.             

Therefore, the launch of the Capital Markets Master Plan, the African Continental Free Trade Area, and the increasing interest in sustainable finance all present opportunities for the development of a robust and sustainable green bond market in Zambia.

The Author is an Economist and a multiple award winning-certified Financial Journalist.