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Environmental, social and governance (ESG) factors are now ingrained themes in making investment decisions. Key risks posed to society were highlighted by the global health crisis, which were exacerbated by the rapid economic downturn that followed. This, coupled with the accelerated need for SA’s transition away from coal, have increased sustainability bond issuances in recent years.

Several initiatives have paved the way to encourage further sustainability-linked issuance and improve disclosure, including the expansion of the sustainability segment and the inclusion of the transition segment by the JSE. This allows issuers to raise funding for, amongst other initiatives, climate or transition related purposes and allows companies to list social, green, and sustainability bonds on one platform. 

Importantly, sustainability-linked bonds (SLB) can be seen as a commercial offering that has a purpose – they are issued with specific targets in mind (Key Performance Indicators (“KPIs”) to be met) – they incentivise companies (i.e., borrowers) to transition from perceived negative practices to ones that will ultimately improve the company’s ESG ratings. If these KPIs are met, it has a positive outcome in terms of the company’s cost of funding. If constructed appropriately, it has the ability to connect a borrower’s ESG objectives with financial outcomes. 

In June 2022, the exchange issued its Sustainability and Climate disclosure guidance for SA issuers to further enhance and encourage comparable disclosures. The guidance seeks to assist issuers in navigating the rapidly evolving landscape of sustainability reporting, improve data quality that will enable investors to make more sound investment decisions, and assist in contributing to the achievement of national and international sustainable development commitments and priorities (such as the UN SDGs).  These initiatives present an optimal opportunity for more effective and comparable disclosures across sectors that are likely to encourage further growth in sustainability-linked issuance in the Debt Capital Market (DCM). 

That said, while multiple factors brought about the radical shift and need for investors to invest more responsibly, the Covid-19 pandemic inevitably shifted sentiment and attention on the E and the S of ESG, as concerns of climate change; lack of green funding and societal gaps came to the fore.  

The need to accelerate SA’s transition away from coal and ease electricity shortages, remain a significant focus area in raising clean energy and transition funding. However, there remains a significant funding gap, needed to finance climate change and adaptation initiatives in order to achieve this. Notwithstanding this, it is encouraging to note that there is a growing number of sustainability and green bond issuances during 2022 in the DCM. While still a small subset of total bond issuances, this market is likely to expand further during 2023, as companies continue to raise funding and commit to greater ESG initiatives and the implementation of standardised reporting practices. 

Incorporating ESG factors into a company’s business strategy, operations and investors’ decision-making is a process that has become essential. Investors seek both credible sustainability performance targets which are ambitious and provide both significant financial reward or penalty as well as positive impact. With the drive to showcase issuers commitment to include sustainability practices in their business, 2021 and 2022 saw several issuers placing sustainability-linked bonds  with performance targets that were mainly linked to select sustainable development goals.

The DCM saw c. R13.5 billion being raised for sustainability, social and green bonds in 2022, while green bond issuance made up about R9 billion over the same period, a sharp increase from the R3.6 billion raised the previous year. The response to the sustainability and green bond issuance is encouraging, with issuance attracting two to three times oversubscription. 

Figure 1: Sustainable debt issuances

Source: JSE data, 2022

Enhanced voluntary disclosures, coupled with the taxonomies; regulatory requirements and increased investor appetite for green and SLB issuances, could see continued rapid growth in the sector. Embedding sustainability in the strategy has the potential to enhance returns and reduce investors’ risk. 

The key remains ESG integration, quality and comparability of data, as well as issuers providing tangible evidence of a coherent sustainability strategy. Paying lip service to sustainability issues is no longer enough for investors and while these initiatives are progressive and in line with global standards, it remains voluntary. Thus, the real value will only be evident once issuers embrace these changes and implement them accordingly – the connection to financial benefits for a company, embedded in sustainability-linked bonds could, in our view, aid in pushing for a meaningful advancement in this field. DM/BM

Author: Michelle Green, Credit Analyst and ESG Chair at Prescient Investment Management

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