ENVIRONMENTAL SUSTAINABILITY: GREEN BONDS AS A FINANCING TOOL FOR BUSINESSES

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BY ADERONKE ALEX-ADEDIPE AND SHARON OKPO

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INTRODUCTION

In our previous publication, we had introduced the concept of environmental, social and governance (ESG), and how organisations can leverage on this to attract ESG investments from ESG-conscious investors.

In the wake of the increased consciousness of corporate entities towards their ESG responsibilities, especially on climate change, Green Bonds have been gaining some popularity across the globe as a means of generating finance to fulfil these corporate responsibilities. States and corporate entities over the years have relied on the issuance of green bonds to obtain financing for climate and environmental projects.

In this publication, we define the concept of green bonds and how they serve as a financing tool.

  1. What are Green Bonds?

Green Bonds (also called Climate Bonds) are debt securities issued by States and organisations to finance or refinance environmental and climate-related projects (“Green Projects”). The Rules of the Securities and Exchange Commission (SEC), 2013 (as amended) (the “SEC Rules”) has defined Green Bonds as “any type of debt instrument, the proceeds of which would be exclusively applied to finance or refinance in part or in full, new and/or existing projects that have positive environmental impact”.

Green Bonds were first issued by the World Bank in 2008 in response to the increasing demand to finance projects which contributed positively to the environment. Since then, the global green bonds market has continued to grow. In 2017, Nigeria issued its first sovereign Green Bond, a 5-year N10.69 billion demonstration green bonds, which proceeds were used to finance renewable energy and afforestation projects.

Green Bonds are essentially the same as the conventional bonds, as they mirror the same repayment structures. The major difference between Green Bonds and the conventional lies in the purpose of the financing; while proceeds from the issuance of conventional bonds can be utilized to finance general projects and other capital requirements, the proceeds from the issuance of Green Bonds are utilized specifically to finance projects that will have a positive impact on the environment.

  1. What are the Principles Governing the Issuance of Green Bonds?

There are voluntary guidelines outlined by the International Capital Markets Association (ICMA) to foster transparency and disclosure and promote trust to enhance the development of the Green Bond market. These principles assist investors by ensuring the availability of required information for the evaluation of the impact of their Green Bond investments in the environment. They also help underwriters to determine certain disclosures that may be required by investors to facilitate transactions and move their market in this direction.

There are 4 main Green Bonds principles, and they are:

  1. Use of proceeds: this is the main and distinctive feature of Green Bonds. The use of the proceeds of the Green Bonds issued must be clearly stated and described by the issuer in the bond transaction documents. The environmental benefits of the Green Projects itemized must be clearly stated in the document. Also, where any part of the proceeds will be used to refinance a Green Project, the issuer must provide an estimate of the proportion that will be used for refinancing.
  2. Process for project evaluation: the issuer is required to adequately inform the investors of the process by which the issuer determines the projects and how they fit into the eligible Green Project categories. The issuer is also required to inform the investor of its environmental sustainability objectives.
  3. Management of proceeds: it is recommended that the net proceeds of the Green Bonds be moved to a separate account or another portfolio, and diligently tracked by the issuer. It is also recommended that while the Green Bonds subsist, the balance of the tracked net proceeds should be adjusted periodically to match allocations to eligible Green Projects made that period. The issuer is also advised to supplement its management of the proceeds using an auditor or a third party to verify the internal tracking method and allocation of funds.
  4. Reporting: issuers are required to maintain and keep readily available up-to-date information on the use of the proceeds, and this is to be reviewed annually until fully allocated.
  1. What Projects Qualify as Green Projects?

The SEC Rules provides that for a project to qualify as Green Projects, the proceeds of the Green Bonds must be invested in one or more of the following:

  1. renewable and sustainable energy
  2. clean transportation
  3. sustainable water management
  4. climate change adaptation
  5. energy efficiency
  6. sustainable waste management
  7. sustainable land use
  8. biodiversity conservation
  9. green building (commercial real estate development)
  10. any other categories as may be approved by the Commission from time to time. 
  1. What are the Legal Frameworks for the Issuance of Green Bonds in Nigeria?

The main legislation governing the issuance of bonds in Nigeria is the Investments and Securities Act, 2007 (ISA) and the SEC Rules (and the relevant amendments). In 2018, the SEC Rules was amended to include rules providing specifically for issuance of Green Bonds, including its definition as provided above, list of investments that qualify as Green Projects, and conditions for the approval of Green Bonds.

The SEC Rules provide that in addition to the general registration for debt issuances applicable to states, local governments, federal governments and corporate entities, an issuer of Green Bonds will also be required to file the following:

  1. a letter from the issuer committing to invest all the proceeds of the bond in the Green Projects itemized;
  2. a feasibility study and report clearly stating the measurable benefits of the proposed Green Projects;
  3. a prospectus which shall include project categories, project selection criteria, decision making procedures, environmental benefits, use and management of the proceeds;
  4. an independent assessment or certification issued by a professional certification authority or person approved or recognised by the Commission.

It is evident that the SEC Rules shows that its provisions relating to Green Bonds align with the principles outlined by the ICMA.

In addition to the SEC Rules, it is important to note that rules of the relevant platforms where the Green Bonds will be listed will also apply to any issuance, e.g. the Listing Rules of the Nigerian Exchange Commission and FMDQ Listing Rules.

  1. What are the Opportunities in and Advantages of Green Bonds?

Some of the advantages of Green Bonds include:

  1. Availability of capital to finance projects while freeing the company’s resources to be utilized for other purposes.
  2. Exposure to a new pool of investors and alternative source of funding- as more bond purchasers clamor to be recognized as ESG friendly, bond issuers are exposed to an alternative source of funding to perform their ESG agenda.
  3. Enhancement of the issuer’s reputation and credibility
  4. Enables a higher level of transparency and accountability that is usually not obtainable with conventional bonds.
  5. In some jurisdictions, issuers of Green Bonds may benefit from some tax incentives such as tax exemptions and tax credits.

CONCLUSION

While the Nigeria Green Bond market is still in its nascent stages, there is evidence of its growing popularity and increased investor interest both within the nation and globally. The exponential increase of investor appetite in Green Bonds makes it viable tool for capital financing. It also provides an opportunity for the public and private sector in Nigeria to attain its climate targets following the Paris Agreement.

SHARE CAPITAL REQUIREMENT FOR COMPANIES WITH FOREIGN PARTICIPATION IN NIGERIA

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Seun Timi-Koleolu and Nuratulahi Yishawu

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Introduction

On the 5th of December 2023, the Corporate Affairs Commission (“CAC”) of Nigeria announced an increase in the minimum paid-up capital requirement for companies with foreign participation from N10,000,000 (Ten Million Naira) to N100,000,000 (One Hundred Million Naira). The notice was issued in line with Paragraph 3, page 5 of the Revised Handbook on Expatriate Quota Administration (2022) (the “Revised Expatriate Quota Handbook”) released by the Federal Ministry of Interior on the 31st of August 2022. However, on the 8th of December 2023 CAC, through one of its social media handles, announced that the initial notice should have been on issued capital rather than paid-up capital and an amended notice to this effect would be issued accordingly.

In view of enquiries made by our clients, we have deemed it necessary to in this newsletter explain the possible implication of CAC’s notice on companies with foreign participation.

Q1. What was the share capital requirement for companies with foreign participation before the CAC notice?

Prior to the notice, the share capital requirement for the registration of a company with foreign participation was N10,000,000 (Ten Million Naira). Hence, at the point of incorporation with CAC, such companies must have a minimum issued share capital of the aforementioned value.

Q2. Are companies with foreign participation required to pay the CAC prescribed share capital at incorporation?

No, companies with foreign participation are not required by CAC to have paid fully for the shares at the point of incorporation. CAC simply requires such companies to issue shares worth the prescribed share capital at the point of incorporation.

Q3 What is the difference between issued share capital and paid-up share capital.

Issued share capital represents the total value of shares that a company has allotted to the shareholders and registered with the CAC while Paid-up share capital, on the other hand, specifically refers to the portion of the issued share capital for which payment has been made by the shareholders.

Q3. What is the consequence of the change in share capital requirement for companies with foreign participation?

The implication of an increase in the prescribed share capital is that the CAC filing fee and stamp duties will be calculated based on the prescribed share capital. As stated earlier the company will not be required to fully pay for the shares at the point of registration.

Q4. What is the relevance of the Revised Expatriate Quota Handbook on share capital requirements for companies with foreign participation?

As a condition for the grant of business permits to wholly foreign owned Nigerian companies and joint venture with foreign participation, the Revised Expatriate Quota Handbook requires that such companies have a minimum paid-up share capital of N100,000,000 (One Hundred Million Naira). Therefore, at the point where a company with foreign participation requires business permit and expatriate quota, the share capital required is a minimum of N100,000,000 (One Hundred Million Naira) paid-up share capital. The value of equipment or machinery imported into the country for the purpose of conducting the business of the company also forms part of the paid-up capital. Please see our newsletter on business permits and expatriate quota. The yet-to-be issued CAC notice seeks to reflect this increased capital requirement, emphasizing ‘issued capital’ rather than ‘paid-up capital.’

Conclusion

In conclusion, we await the new notice on increase in issued capital by the CAC and it is hoped that the new directive would provide further clarity on the share capital requirements for companies with foreign participation in Nigeria.

GUIDANCE ON FILING OF DATA PROTECTION COMPLIANCE AUDIT RETURNS IN NIGERIA

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Aderonke Alex-Adedipe and Olawale Atanda

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Introduction

The Nigeria Data Protection Commission (NDPC) recently issued a Guidance Notice (the“Notice”) on the filing of data protection Compliance Audit Returns (CARs) ahead of the next cycle for the filing of CARs in 2024. The Notice provides information and instructions for data controllers and data processors on how to comply with the Nigeria Data Protection Act (NDPA) 2023 and the Nigeria Data Protection Regulation (NDPR) 2019. A summary of the Notice is described in this newsletter.

1. Filing Compliance Audit Reports

Further to the provisions of the NDPR and the direction of the NDPC, Data Controllers and Data Processors are required to file CARs with the NDPC by March 15 2024. The CARs filed should focus on: data protection principles; lawful basis of processing data; technical measures for ensuring confidentiality, integrity, and availability of personal data; and grievance redress mechanism, amongst other compliance matters stipulated under the NDPR. Data Controllers and Data Processors that are not yet compliant as at March 15, 2024 may also submit a memorandum of their intention to regularize their data processing activities in line with the NDPC by March 31, 2024. It is important to note that CARs must be submitted to the NDPC through licensed Data Protection Compliance Organisations. Furthermore, a default fee of 50% of the filing fee will apply where a Data Controller or Data Processor fails to file their CAR by the March 2024 deadline.

2. Free Training for Data Protection Officers

The NDPC will organize a free induction training for all designated DPOs in January 2024. The training will cover the rights of data subjects and compliance obligations under the NDPA as well as the NDPC’s General Application and Implementation Directive (GAID) which will be released in 2024.

3. National Data Protection Adequacy Programme Whitelist

The NDPC has provided a compliance metric for Data Controllers and Data Processors to be included on the National Data Protection Adequacy Programme (NaDPAP) Whitelist.[1] The metrics include conformity with data protection principles, accountability, sensitization, appointment of a DPO, engagement of a DPCO, filing of CAR, data privacy impact assessment, internal remediation mechanism, information security certifications, and continuous awareness/capacity building. The maximum score for each metric is 10 points, and the total score is 100 points.

The Whitelist is a tool of accountability and transparency that shows the commitment of Data Controllers and Data Processors to safeguarding data subjects rights. However, the NDPC also reminds that publication in the Whitelist is not a shield against the complaints of data subjects.

 

4. Effect of Non-Compliance

The NDPC warns that failure to comply with the Notice which results in a contravention of provisions of the NDPA may result in enforcement orders, sanctions, penalties, or remedial fees as provided in the NDPA. The penalties under the NDPA range from NGN2 Million to NGN10 Million, or 2% of the annual gross revenue, depending on the size and importance of the Data Controller or Data processor.[2]

 

Conclusion

The Notice is a useful guidance for Data Controllers and Data Processors aiming to comply with the NDPA and wishing to be included on the NaDPAP Whitelist. For a deeper understanding of data protection in Nigeria, we invite you to explore our collection of articles via this link.