With trillions of dollars of expenditure globally going towards supporting green infrastructure, affordable clean energy, and responsible consumption and production, there is much evidence that both the public and private sector are prioritising the SDGs (Sustainable Development Goals) set out by the United Nations according to Agenda 2030.
Given that we are now in the last decade to reach these goals, it is critically important that the global economy gears itself towards sustainability. “Financial markets are now actively responding to climate issues,” affirms Professor François Viruly, property economist and lecturer at the University of Cape Town. “Previously it was in response to legislation, but now investors are pushing this agenda.”
Green bonds, an instrument used by governments and companies to raise money by borrowing from investors – the proceeds of which are directed to projects or assets with environmental benefits – are seen as a method to accomplish green goals. “The data shows that green bonds are increasingly popular, with most falling into sectors like energy and transport, which have high CO2 emissions. We also are starting to see green bonds in emerging countries, especially in the East,” says Prof Viruly.
Considering the green bond
The rationale behind corporate interest in green bonds is multi-faceted. Companies are aware of the signal that is given out when they undertake a green bond, of a positive impact on environmental and social sustainability. This, in turn, has a positive impact on the share price, with growing evidence showing that companies that aim to incorporate social and environmental governance are generally well-run. While the potential for green bonds to be issued as a type of “greenwashing” exists (as a tool for good marketing with no real sustainable intention), as the process involved is complicated and can be expensive, not many corporations would go to these lengths. The third reason relates to financial returns and pricing, with corporations showing interest if there is a premium on a green bond.
With the first green bond having only been issued in 2014, there are mixed reviews about how much more or less expensive this type of loan is. Dirkje Bouma, group treasurer of Growthpoint Properties, says that green bonds give an economic upside of up to 0.2% compared to a normal bond, which attracts a greater diversity of investors seeking environmental impact. “Moreover, the reputational benefits are significant; in Growthpoint’s case the company has been able to add green credentials to their existing brand, as well as being able to offer investors the opportunity to display empirical evidence that they are abiding by the principles of responsible investing. This is alongside the quantifiable, anticipated environmental benefits.”
Shameela Soobramoney, chief sustainability officer at the Johannesburg Stock Exchange (JSE), pointed out the distinction between sustainable finance, which encompasses models, products, markers and ethical practices to deliver resilience and long-term value in each of the environmental, economic and social aspects, thereby contributing to the delivery of the SDGs and climate resilience. “Responsible investment, on the other hand, is strategy and practice to incorporate environmental, social and governance (ESG) factors on investment decisions and to encourage active ownership of these by borrowers and investors,” she says.
When looking at the ESG investments in numbers, it’s possible to see growth of, on average, 25% since 2014, across countries like Japan, Australia and Canada. The total combined issuances in 2020 was $554.3-billion, with $222.6-billion directed towards green, and $164.2-billion and $127.6-billion towards social and sustainability respectively. Locally, issuance volumes of close to R6-billion have been in the bond market since 2019 to date.
In March this year, South African private healthcare provider, Netcare, in partnership with Standard Bank, listed the continent’s first self-labelled sustainability-linked bond on the JSE. They raised a R1-billion, three-year, unsecured note priced at 5.4%. The funds raised through the bond will enable the healthcare group to fulfil its sustainability objectives of reducing its carbon footprint, by procuring more renewable energy and further improving its water efficiency, among other things.
RMB also issued the largest South African rand denominated sustainability bond, the first of its kind to African state-owned company Rand Water. RMB are also partnering with Redefine for the largest sustainability-linked bond in the real-estate sector, while Standard Bank and Woolworths partnered to execute the first sustainability-linked loan in the country to the retail sector. Nedbank listed a R125-million unsubordinated green bond on the JSE, while ABSA launched their green home loan through Balwin Properties.
The investor universe
Arvana Singh, head of sustainable financial solutions at Nedbank, posed the important question of how ESG integration and the flow of capital can be incentivised into areas of the economy where it is needed most. The investor universe is made up of a number of funders: traditional asset managers, who are looking for commercial returns, and impact investors, who are willing to trade off a slight decrease in return in exchange for change and impact. The third type of investor, interested in blended and catalytic financing, generally falls to developmental financial institutions interested in driving the impact agenda. “These investors are increasingly using financial intermediaries, like Nedbank, to achieve this goal. This does require additional transparency and origination of eligibility criteria, as well as impact reporting, which means that organisations that promote ESG goals are generally more compliant, and their governance is better.”
While anything linked to renewable energy and water saving is seen as favourable by investors, Soobramoney says that while many are quite aware and willing to consider adaptations, this doesn’t always translate into action. “In financial markets, the short-term perspective dominates, and the ‘internalise profit and externalise cost’ mindset needs to be addressed,” she says. Another challenge is that the initial costs of obtaining green finance are high, due to external verification requirements, and this will prove more difficult for smaller or local businesses. “And then there is still a fairly acrimonious relationship between the public and private sectors, meaning that the collaboration necessary to make the SDGs achievable has not been actualised yet,” Soobramoney adds.
Despite the challenges in the current economic climate, there is certainly an opportunity for smaller companies to be nimble and to look at the SDGs – if the company’s primary purpose is green, then a revenue data-collection process can identify what percentage of revenue is attributed to activities that are congruent with the green economy. This means that smaller organisations can approach markets and raise capital, by virtue of their sustainability agenda.
The experts agreed that there is evidence of investor engagement with banks; their equity holders are encountering pressure and trying to make impactful changes. This is reflected in the broader ESG industries or those with a climate or social focus, where they’re experiencing a level of liquidity and market capital, and this translates to a desire to outdo their competitors or appease their investors.
If corporations aimed to evolve sustainable finance structures with embedded sustainability performance targets that reach further than just climate risk, it would be possible to see more exponential growth. Another opportunity would be the evolving accounting and reporting standards and regulations to enable the measurement of true societal profit and loss.
Finally, the experts agreed that there is an opportunity for greater accountability of our ecosystem’s limits. Business models cannot continue the way they are, both from a risk perspective as well as from an environmental perspective. Given South Africa’s innovative nature, embracing responsible investing and sustainable finance will go a long way towards building not only a better economy, but also a greener economy.