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How green is your portfolio? Why green bonds make financial sense
The uptake of green bonds by investors on the JSE demonstrates both appetite and willingness to participate in this market. With the private sector leading in the green bond market, it highlights how responsible investments have become a top priority, especially with regard to climate investments.
Climate change is widely acknowledged as one of the greatest long-term challenges facing humanity. To address this challenge, various high-level climate negotiations have taken place over the past decades to find solutions to accelerate adaptation and mitigation strategies.
The Conference of the Parties (COP) has been at the forefront of climate negotiations and after decades of back-and-forth, it seemed like finally, a breakthrough occurred with the 21st COP where the Paris Agreement was adopted in December 2015. This agreement has been regarded as historic as 195 countries unanimously agreed to attempt to limit global temperature increase at well below 2°C. However, as ambitious as this was, billions of dollars in investments are required to ensure that countries, especially those in the global south, have the resources to combat climate change.
Climate change has affected the global economy. The World Economic Forum’s Global Risks Report 2016 highlighted how climate change has and will continue to jeopardise the growth of many economies. This has already been witnessed through the loss of productivity in areas such as agriculture and fisheries as well as increasing damage to infrastructure. As a result, there has been a rise in the importance of private capital being mobilised towards investments for climate change adaptation and mitigation projects.
However, for developing countries, especially in Africa, there have been various challenges in accessing and mobilising climate investments. At the recent Africa Climate Week held in Ghana, some of the key discussions revolved around the need for increased financial flows to combat climate change as multilateral funds alone are insufficient. This highlights the need for many African countries to think outside of the box and tap into new innovative finance mechanisms such as green bonds to address the climate investment challenge.
Green bonds have been one of the most promising emerging and explosive finance mechanisms globally. There is no universal definition of green bonds, but there is a growing consensus on what they are and what they are intended to do. They are generally referred to as bonds whose proceeds go directly into climate and environmental projects. The Climate Bonds Initiative, among other organisations, has been instrumental in helping the private and public sectors issue and certify green bonds as well as determine eligible green projects in which to invest.
The 2018 Green Bond Impact Report by the International Financial Corporation reported that the growth of the green bond market began with a couple of issuances in 2007 to a growth of more than 80% of new issuers, amounting to more than $200-billion in 2018. Almost completely unknown a decade ago, green bonds can now potentially offer a path forward to transition towards a low-carbon society, backed by governments and various investors.
The explosive growth of the green bond market has been mostly observed from the developed region where countries such as France, Germany, the Netherlands and the US have been among the top issuers over the years. This growth has been highly promoted and supported by governments and investors in these countries.
However, it seems developing countries are slowly lagging behind and are not as active in the green bond space. In a 2019 article by Josué Banga, the author highlights key barriers to the growth of the green bond market in developing countries. Some of these barriers include institutional barriers which are further compounded by market barriers, although he concludes on a positive note by stating that “the appropriate policy measures could help address these challenges and enable the green bond market to take root”.
Despite the various challenges that developing countries face, it is important to acknowledge that there are massive opportunities for the growth of green bonds. South Africa is a country that is leading by example on the African continent in this market. The country witnessed the first municipal green bond issued by the City of Johannesburg in 2014 worth R1.5-billion. The bonds have allowed the City of Johannesburg to demonstrate its commitment to environmental stewardship and proceeds are funding a range of projects in different sectors, such as low-carbon infrastructure.
Followed by this, the City of Cape Town’s green bond was the first in the country to be listed on the Johannesburg Stock Exchange (JSE) green segment with a green bond of more than R1-billion in 2017. The resounding success of this green bond issuance resulted in the City of Cape Town being awarded “Green bond of the year” by the Climate Bonds Initiative.
On the other hand, the private sector has really shown an impressive stance and is active in accelerating the growth of the green bond market in the country. The JSE’s green bond segment has been an effective toolset at international best practice to allow investors to contribute to raising capital for sustainable projects and boosting ESG (environmental, social and governance) investment.
There have been several success stories of corporate companies such as GrowthPoint Properties in 2018 being one of the first South African real estate companies to issue a green bond on the JSE of R1-billion. Proceeds are reported to go into energy efficiency and green office buildings.
In 2019, Nedbank was the first corporate bank in the country to issue green bonds of over R5-billion, all of which were oversubscribed, and proceeds are expected to go into renewable energy projects.
The fact that there was such a frenzy over these green bonds demonstrates investor appetite and willingness to participate in this market. With the private sector leading in the green bond market, it highlights how responsible investments have become a top priority, especially with regard to climate investments. Even though the green bond market is still small in this country compared with the rest of the world, it definitely has the potential to increase.
Why should South Africa be more active in this space? Green bonds could complement the country’s policies and strategies with regard to climate action. South Africa’s draft National Climate Change Adaptation Strategy highlights the need for new funding flows to support adaptation and climate resilience projects. Green bonds offer this unique opportunity for the country as it can foster public and private partnerships to achieve climate goals as well as allow bond proceeds to be allocated to a range of green projects that still need to be funded.
In future, there would be a need for continuous monitoring and evaluation of the green bond market. This would entail both private and public sectors measuring the impact of green bonds and their contribution to environmental projects, giving an indication of the climate goals that green bonds have helped in achieving as well as areas that still need to be prioritised.
There is also a need for increased transparency and accountability from issuers to avoid instances of green bonds being labelled as “greenwashing”.
With the dawn of a new political era and the anticipation of President Cyril Ramaphosa making the country a hot-spot for investments, it would be interesting to monitor the growth of green bonds from various sectors. Green bonds have the potential to unlock much-needed investment for environmental projects and feed into the broader Green Economy framework that the country has been trying to stimulate over the years.
Given the proper institutional arrangements and visionary leadership, green bonds can be the necessary investments we have been waiting for to aid us in transitioning towards a low-carbon South Africa, supported by both the public and private sector. DM
Nomhle Ngwenya is a PhD candidate at the University of the Witwatersrand. Her research looks at the role of institutional frameworks in promoting green bonds to finance carbon capture and storage. The South African Centre of Carbon Capture and Storage (SACCCS) funded her Honours research which looked at stakeholder engagement of carbon capture and storage.
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