Promoting transition finance for carbon-emitting industries in Nigeria

BY ANTHONY IZUAGIE

In 2023, UNIDO noted that a net zero world is unachievable without decarbonising hard to abate industries such as oil and gas. According to the University of Cambridge Institute of Sustainability in Leadership Business Briefing 2024, Africa greenhouse emission reached 5GtCO2e or 9.3% of global emission by 2022. In no order, the largest emitters were South Africa, Nigeria, Egypt, Algeria and Ethiopia producing over 50% of Africa’s emissions.  The report noted that about $2.5 trillion is needed by 2030 to meet Africa’s commitment to decarbonisation moreover South Africa, Nigeria and Egypt would need the lion share.

Each country has nationally determined contributions (NDC) to achieve by 2030. Nigeria plans to reduce emissions by 20% compared to its Business-as-usual (BAU). Accordingly, Nigeria has set out to achieve 19 outcomes in the NDC plan, $20 million dollars representing 1% was voted for industry out of $189 billion dollars earmarked for climate action. Climate action is a global phenomenon with increasing regulations year in year out.

Decarbonisation is one of the climate solutions and it is not only about transiting from one type of energy source to eco-friendly sources such as from fossil fuel to renewables, it is also about the replacement of carbon dioxide emitting technologies in all plants and machinery. One of the highpoints of decarbonisation is the design and adoption of a transition strategy for hard-to-abate industries or high-emitting companies in sectors like steel manufacturing, oil and gas, aviation, cement mills. South Africa through its government has taken steps to secured fundings from developed nations to finance its transition from coal powered processes to renewable energy. Decarbonisation is serious business for both the government and the private sector. Nigeria, listed as one of the largest emitters has not shown so much commitment to invest in decarbonisation but on enforcement of regulations.

There is seeming silence about the climate campaign but what is sure is that the climate agenda is a lofty goal to save the earth and cannot be overlooked.  A look at the Nigerian Stock Exchange (NSE) and based on sector classification, most companies listed under the following sectors—industrial, oil and gas, and consumer goods may fall prey to a transition trap. Transition of Nigerian industries especially those on the listed is important because of their uniqueness to investors in sub-Saharan Africa. In 2024, the Nigerian stock exchange earned a fantastic return of 37.26% and was awarded one of the best-performing exchanges. It is a delight for investors.

Aside from the banking sector, most companies within the oil and gas sector, consumers goods sector, industrial sector have plants and machinery with a useful life of average of 20 years still combusting with fossil fuel. This means that assets with useful life of twenty years will be forced to decommission in five years when it is 2030.To avoid any shock to hard-to-abate industries, transition finance is an easy way to meet the goals of decarbonisation.

The Organisation for Economic Cooperation and Development (OECD) view transition finance “as any approach intended to decarbonise entities or economic activities that are emission intensive, it may not currently have low or zero emission substitute that is economically available or credible in all context but are important for future socio-economic development”.  It is any finance to replace carbon-emitting property, plants and equipment in the balance sheet. If this is not well managed, companies emitting carbons would be downgraded for increased environmental risk.

Below are reasons why transition finance is the better solution for hard-to-abate industries.

First, it requires a transition plan. This contains the actionable steps of achieving net-zero carbon emission. Currently, there are no specific formats for designing such plans however it signifies an overarching commitment by the borrower to fulfilling the Paris Agreement. Most importantly, a transition plan clarifies the operational framework and highlight key net-zero performance indicators to be achieved.

Second, it allows managed phase out of assets. This is about a systematically conscious approach design for replacing emission plants and machinery in the company’s asset register without punctuating the operation of the company. It is a replacement strategy that ensures the continual operation of the company combined with a phased-out of decommissioned polluting assets.

Third, issued at a low cost. Transition finance just like other ESG tailored instruments are in the form of debt and bond. These instruments are benevolently issued at lower rate compared to similar financial instruments. These instruments are designed to motivate investments in renewables energy and other net-zero technologies that will make the earth free of emissions.

Fourth, it requires a flashcard of sustainability disclosures. Transition financing requires regular reporting on sustainability and ecofriendly activities of a company. When companies finance their asset replacement with transition finance, they consciously provide evidence of the company’s commitment to attain net-zero emissions. Usually, lenders demand frequent reporting as part of monitoring to ensure that the goals of financing such projects are met.

Fifth, it insures the value of a firm. The scare of an emergency phase-out of asset will affect the value of a company both its book value and market value. The total asset of a company will reduce by the net book value of the decommissioned assets while investors may react to the risk of loss of earnings due to the elimination of these assets from the company’s operation.

Sixth, it promotes transparent reporting. Currently, companies in Nigeria use the reporting process to demonstrate their progress towards net-zero emissions. Borrowers who subscribe to transition finance will demonstrate a higher level of transparency to the lenders and the public through an effective reporting process.

In conclusion, the landscape of transition financing in Nigeria is yet to gather momentum. No project financed with transition finance has been recorded in the country. This is due to lack of understanding by local lenders, low level of international support and the quantum of financing involved. Transition finance is a thematic approach within the framework of sustainable finance.

Long term finance of this nature requires so much commitment from the lenders and borrowers. Industries in Nigeria are part of the global landscape of transition finance which means these companies can negotiate and procure transition finance from international corporation to replace hard-to-abate assets that may be phased out of circulation as decarbonisation regulations evolve with time. Nigerian companies are encouraged to seek these opportunities.

Anthony Izuagie is an MBA candidate and CFA level 3 candidate. He is at Dillard College of Business Administration. He can be contacted at [email protected]