In 2023, UNIDO noted that a net zero world is unachievable without decarbonising hard-to-abate industries such as oil and gas, etc.
According to the University of Cambridge Institute of Sustainability in Leadership Business Briefing 2024, Africa’s greenhouse gas emissions reached 5 GtCO₂e or 9.3 percent of global emissions by 2022. In no order, the largest emitters were South Africa, Nigeria, Egypt, Algeria and Ethiopia, producing over 50 percent 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’s share.
Each country has nationally determined contributions (NDC) to achieve by 2030. Nigeria plans to reduce emissions by 20 percent compared to its business-as-usual (BAU). Accordingly, Nigeria has set out to achieve 19 outcomes in the NDC plan; $20 million, representing 1 percent, was voted for by industry out of $189 billion 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 fuels to renewables; it is also about the replacement of carbon dioxide-emitting technologies in all plants and machinery. One of the high points 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, and cement mills. South Africa, through its government, has taken steps to secure funding 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 investing in decarbonisation but on the 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. The transition of Nigerian industries, especially those on the list, 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 percent 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, consumer goods sector, and industrial sector have plants and machinery with a useful life of an average of 20 years still combusting fossil fuel. This means that assets with a 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 Cooperation and Development (OECD) views transition finance “as any approach intended to decarbonise entities or economic activities that are emission intensive; it may not currently have a low- or zero-emission substitute that is economically available or credible in all contexts 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 carbon 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 highlights key net-zero performance indicators to be achieved.
Read also: Nigeria oil licence applicants must prove low carbon emissions, Nigerian regulator says
Second, it allows managed phase-out of assets. This is about a systematically conscious approach to 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, is in the form of debt and bonds. These instruments are benevolently issued at a lower rate compared to similar financial instruments. These instruments are designed to motivate investments in renewable 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 eco-friendly 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 ensures the value of a firm. The scare of an emergency phase-out of an asset will affect the value of a company, both its book value and market value. The total assets of a company will be reduced 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 a lack of understanding by local lenders, a 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 corporations 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].
