Is there a place for ESG in South Africa?
A softening of SA’s debt credit market issuance levels reflects a prudent approach from businesses looking to de-risk and deleverage during a period of sluggish economic growth. Yet within this slow-moving system, there is one subset bucking the trend, which has shown robust investor appetite: the sustainable bond market.
Statistics suggest that the issuance of sustainable bonds is on the rise. As detailed in the graph below, since the inception of the first green bond in 2014 by the City of Johannesburg Metropolitan Municipality, the SA credit market has witnessed cumulative issuance of R27.8 billion sustainable bonds, including R13.8 billion in 2021, and R4.7 billion in 2022 to date.
Graph 1: Sustainable Bond issuance history in South Africa
These figures include several bond types that are all geared towards sustainability but vary in how they are used. While green bonds are committed to financing projects with positive environmental impacts, social bonds fund social impact projects such as low-cost housing. Proceeds from sustainability bonds are used to finance a combination of green and social projects, while sustainability-linked bonds are structurally linked to the issuer’s achievement of wider SDG goals.
In April 2022, FirstRand listed two sustainability bonds totalling R2 billion, as part of a long-term programme to raise R72 billion for its own sustainability projects. This came a few months after Investec issued its very first R1 billion green bond, to support a number of its flagship renewable energy projects. Both of these were via public auction.
Nedbank, one of the first movers in this space, came to market with a R1 billion green residential bond listing to fund green residential developments, after which it facilitated a R200 million facility to Vukile Property Fund. The funds to Vukile were earmarked for already installed solar energy projects and also to fund planned solar farms. In the same month as the Nedbank issuance, Standard Bank Group successfully placed R1.4 billion of green bonds.
Two notable social bond issuances over the last 12 months include the private placement by Standard Bank Ltd, issuing R1.5 billion, and then Urban Ubomi, with R440 million placed. Sustainability-linked issuance by Fortress (R1.3 billion) during February 2022 followed its R900 million similar issuance during August 2021.
Why sustainable bonds?
The benefits of sustainable bond issuance for issuers are clear. Not only does it allow investors (i.e., lenders) access to opportunities they would previously not have had access to (e.g., green funds can now support borrowers who utilise these “green” channels to raise capital), it also enhances an issuer’s reputation as a means to raise awareness of its commitment to sustainability. What’s more, in a time where we have seen a marked shift in investor sentiment towards responsible investing, it is becoming more evident that sustainable bonds can attract robust investor demand, leading to oversubscription of auctions and also greater pricing benefits for issuers.
The PIM Credit approach: A Systematic Data-Rich Investment Process
At Prescient Investment Management (PIM), we pride ourselves on being an evidence-based investment house that makes decisions off the solid foundation of our well-tested and robust investment process. We furthermore prioritise risk management.
With this being said, as with all other financial risks, we firmly believe that embedding ESG considerations into the investment process is critical to achieving favourable investment results, which notably means a broader set of risks are able to be properly assessed, managed and ultimately appropriately priced.
Our ESG scorecard is a multi-factor model that assesses the three main pillars: Social, Environmental, and Governance. It is based on 62 factors and abides by the trifecta of finance in that each derived score for each counter has an ESG component.
Graph 2: PIM ESG Scorecard
In line with our philosophy, the scorecard is 100% quantitative and free from human biases – our systematic approach translates qualitative data to quantitative scores. Importantly, our model takes a one-, three- and five-year view, enabling us to record and track implementation of ESG policies.
Data: what next?
As an example of our process in action, the graph below highlights our ESG scoring for select sectors. As we observe sectoral trends or delve into the underlying factors per pillar (at a point in time or over time), we are able to draw meaningful insights.
Graph 3: PIM ESG Scoring (excerpt)
As a supporter of active stewardship over exclusion, the output of our scoring process allows us to engage with company management and have pointed, data-oriented conversations surrounding ESG targets and implementation. Simplistically, our process puts us in a position where we are able to apply capital at the appropriate risk-adjusted spread, and importantly, over time positive, and through our efforts, contribute to long-term change.
ESG thinking is long-term thinking
We at PIM are long-term investors, and as such we will direct capital to entities that are similarly long-term focussed. It is for this reason that our multidimensional approach, which embeds ESG into our default risk assessment, has shown us that companies with sustainable thinking report improved credit metrics. Simply put, over time they show a better credit risk profile.
At PIM, however, we believe that while sustainable bonds may enable issuers to score better on environmental aspects directly, it will also filter to other areas. It is important to remember that the various ESG pillars are inherently interlinked – the consideration of the stakeholder interest in one area has spill-over benefits into another area.
While we were cautiously optimistic about the year ahead for investment markets due to prolonged economic uncertainty, the surge of sustainable bond issuance in the market provides a glimmer of hope for a credit landscape that has not shown any meaningful growth for years. The consideration of these opportunities, and potential investment thereinto talks directly to our belief in playing a pivotal role in shaping the ESG landscape in our country – these tie in with our core objective of being an investment house that prioritises sustainability. DM/BM
Author: Conway Williams, Head of Credit at Prescient Investment Management.
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