According to Bruce Stewart, head of debt capital market origination at Nedbank CIB, the issue of Renewable Energy Bond forms a key part of Nedbank’s commitment to delivering tangible financial support to projects that contribute towards the achievement of the United Nation’s Sustainable Development Goals.

The organisation has now joined Growthpoint, the first to list a green bond in 2018, and the cities of Johannesburg and Cape Town have followed suit.

Donna Nemer, director of capital markets at the JSE, says the listing will add clout to the three bonds listed in the segment, which has a market capitalisation of R5.10-billion. Environmental, social and governance focused assets (ESG) aren’t simply a nice to have.

“It is about positioning our market for a more resilient, green economy and providing investors with socially conscious debt products.”

Sprouting in 2017, the sector aims to help companies and other institutions to raise funds ring-fenced for low-carbon initiatives. In addition, it enables investors to contribute towards mitigating the effects of climate risk as part of their investment portfolio.

“Many institutional investors have mandates that require them to list in listed instruments. With the growing interest in sustainability, many have added to that mandate companies and projects with a proven sustainability focus,” says Terence Gregory, CEO of the listed specialised financial services group Ecsponent.

The rationale for these prescriptions extends beyond a desire to protect natural resources. Studies have shown that companies with robust sustainability practices demonstrate stronger operational results and often prove more resilient in economic downturns. These projects also provide opportunities for diversification.

The credit rating agency Moody’s expects this market to grow by a further US$135-billion in 2019. The global market for green bonds is already at US$895-billion and the year-on-year issuance has doubled in size annually over the past two years.

John Haslett, portfolio manager, Alpha Asset Management, says the Nedbank bond is not asset-backed, which is in line with ordinary senior unsecured bonds committed to green projects. They should trade similarly to these types of bonds — most managers primarily take credit exposure on the fixed income size.

“Liquidity is the key issue for most managers currently, given the much smaller size of the green bond segment relative to the demand for these specific instruments, especially compared to “normal” bank bonds, which would have to be a consideration if one needed to divest from the bond sometime in the future,” he says.

All fixed income managers continue to monitor this space as part of their general ESG policy, but have yet to commit large amounts of capital. But importantly the yield vs risk on these bonds for comparable bank paper would need to be assessed.

Furthermore, Prescient has written that it foresees an uptick in the issuance of these type of bonds especially after the huge appetite for the City of Cape Town and Growthpoint issues. According to Matrix Fixed Income Managers, the future of these bonds will depend on the size of demand for green investment — whether ESG forces general funds into these or whether it will be mostly infrastructure or green funds investing in green bonds.

“These corporates have had a pricing benefit as well, as investors price in a discount for green issuances. The common challenge for investors remains the pricing of these instruments and the non-standardised “green accreditation” mechanism. As the market evolves, this is expected to normalise the flow of funds. Investors know exactly which projects they are funding and can track the performance of those underlying projects through periodic reporting by the issuers.

So in theory as a green fund, you should be willing to accept a lower return over time — this is up for debate. Other developments in the green bond segment could be asset-backed bonds/project bonds — where the proceeds are ring-fenced for projects and the project revenues are ring-fenced for the bonds’ repayments — this too should result in a lower yield.

Project bonds would usually have relatively long term-to-maturity, in line with the life of the underlying project — so higher duration that could impact negatively on appetite from general funds versus dedicated green funds. This is a new segment for SA (and globally for that matter), and still needs to be tested. Historically the bias has been towards general funding that gives the issuer more discretion.

While the green bond is relatively new for emerging markets, it forms part of a bigger theme that has been gaining traction globally in the asset management industry for a number of years. DM