GREEN FINANCE

Morocco's green bonds supporting a switch to cleaner energy

With Morocco’s future electricity generation capacity firmly dependant on renewable energy sources, attracting private financing for new projects is critical. Green bonds are an increasingly viable option to help finance energy production in the kingdom. Although they were initially restricted to multilateral finance institutions, more and more private lenders and institutions are following the same path. Expanding the role of green bonds and other types of environmentally sound financing will nonetheless depend on the presence of adequate regulation and the necessary market incentives.

Despite being a relatively new addition to the capital markets arena, green bonds – fixed-income securities used to raise capital for low-carbon or environmentally sustainable projects – have quickly become an efficient way to attract capital to sustainable projects with an environmental component. Green bonds were first issued by the European Investment Bank (EIB) in 2007. The EIB has continued to use green bonds to finance its lending to renewable energy projects in different regions of the world.

Domestic Potential

For Morocco in particular, green bonds and other financing instruments with an environmental component might be an essential mechanism for the country to reach its renewable energy goals. Current government plans aim to have 52% of electricity capacity come from renewable sources. Furthermore, the kingdom is planning to reduce its carbon emissions by 32%. This would be a tall order for most countries, but will prove especially testing for a nation of over 35m people that needs high rates of economic growth in order to reduce various inequalities. Renewable energy projects are expected to account for most of the $45bn in investment that Moroccan authorities have earmarked for the sector over the coming decade.

“Green financing is more developed in Europe than in Morocco, but we are on the right path, and our market will certainly have use for it,” Abdesslam Ababou, managing partner at Red Med Finance, told OBG.

Prompted by its strong commitment to environmental sustainability, Morocco had already approached the green bonds market from an investment perspective. When it hosted the COP22 UN Conference on Climate Change in 2016, the kingdom announced it would buy $100m in green bonds issued by the World Bank, which has been using this mechanism to help support loans for climate change-mitigation projects in several countries.

Local Issues

Within the kingdom, the first institution to issue a green bond was the Moroccan Agency for Solar Energy. It tapped the market in 2016, issuing a $118m green bond to help pay for three solar energy projects under the Noor I solar project. That year BMCE Bank of Africa became the first Moroccan bank to participate, launching Dh500m (€45m) in green bonds with a five-year maturity period to finance several renewable energy projects in its portfolio. The bank was soon followed by other large-scale Moroccan lenders, such as Banque Centrale Populaire, which issued a €135m bond with a 10-year maturity. As of early 2019 the total amount of green bonds issued in Morocco had reached Dh3.65bn (€328.3m), according to figures from Red Med Finance.

However, the successful adoption of green financing mechanisms will ultimately hinge on a change of attitude in the kingdom’s financial sector. Morocco boasts a sophisticated banking sector that has been able to successfully expand across the African continent. However, its success in the banking retail space has obscured a more cautious attitude when it comes to financing projects.

“There are a lot of projects worth financing, but there is some adversity to risk,” Ababou told OBG. Overcoming the banking industry’s current focus on credit allocation and the capture of deposits will thus be especially critical for the renewable energy sector.

Green financing attracts investors to Morocco's banking sector

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As businesses and governments worldwide seek to finance the vast investments required for projects to combat climate change and make the global economic model more environmentally sustainable, green bonds have become a popular capital market vehicle. The products are typically structured like a corporate or sovereign bond and asset-linked, but are used to raise money exclusively for sustainable climate and environmental projects. Interest in the environmental, social and corporate governance agenda has also been an important driver of the segment’s expansion. As of early 2020 there had been five green bonds issued in Morocco to fund projects such as solar power plants, energy efficiency and sustainable buildings.

Regulatory Framework

In recent years Morocco has developed regulations to encourage the proliferation of green bonds. In 2016 – ahead of the country’s first green bond issuance – the Moroccan Capital Markets Authority (Autorité Marocaine du Marché des Capitaux, AMMC) published guidelines developed in partnership with the International Finance Corporation that set the ground rules and operational framework for green bonds. The guidelines explained how potential issuers should identify and select applicable projects, have the projects independently reviewed, and secure necessary authorisations from the regulator. The document also outlined reporting requirements.

From a regulatory standpoint, green bonds are treated similarly to traditional bonds, albeit with additional steps to ensure the funds raised are environmentally conscious and sustainable. The offerings have been successful, and authorities from around the region are taking note. “Green bonds are becoming increasingly important, and we are seeing significant interest from investors,” Nasser Seddiqi, director of financial operations and markets of the AMMC, told OBG. “Because Morocco is among continental leaders, regulators from other African countries are coming to us to learn how we adapted our regulations to support green bonds.”

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