The JSE has been developing offerings across asset classes that promote responsible investing. This includes the launch of its Green Bond Segment, which provides a platform for 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.
Responsible investments have become a business priority for many organisations across the globe. The energy industry has especially felt the pressure to adapt to a world where climate change can no longer be ignored.
Green bonds provide a commercially practical way to finance changing business models for this industry (and others) as it shifts to increase its focus on renewable energy sources, such as wind and solar power, as well as natural gas.
French energy company Total is one of the leaders in the field – it issues green bonds to finance a strategic shift toward renewable energy, and is today the world’s largest solar power developer.
This should be a lesson for South Africa, as the country is experiencing increasing demand for renewable energy sources, but developers often lack the requisite funding.
Global market for green bonds
The global market for green bonds is currently valued at $895 billion, and the year-on-year issuance has doubled in size annually over the past two years. Although credit rating agency, Moody’s expects this market to grow by a further $135 billion this year, the South African green bond market is still in its infancy.
The local market has only four green bonds listed, and investor demand needs to grow in this important segment. However, we believe there is significant potential for growth in South Africa.
The Pension Funds’ Act Regulation 28 requires that investments have to include environmental, social and governance (ESG) considerations in their investment portfolios.
A green bond is one such product that speaks directly to this requirement. With the global growth in this field, we have seen that green bonds give issuers the ability to attract new investors with an SRI or ESG focus.
Green bond listing requirements
Local issuers can take comfort that the JSE’s green bond listing requirements have been aligned with international best practice, while keeping it in the context of the South African economy to include specific rules pertaining to green bonds.
This includes a requirement for an independent reviewer to be appointed to confirm that an issuer’s bond can be classified as green according to accepted industry standards.
The JSE also includes an additional risk-mitigating tool through its requirement that green bond issuers disclose the proceeds generated through issuance, as well as how these funds are applied throughout the lifetime of the bond. This creates assurances of transparency and good governance.
Emerging market economies cannot afford to ignore the risks of climate change, as these countries are extremely vulnerable to the effects of irresponsible environmental practices. In the South African context, green financing speaks to securing employment opportunities and investment for the future.
The City of Cape Town’s green bond, which listed on the JSE earlier this year, was five times oversubscribed, demonstrating that there is appetite for good-quality ESG focused assets. The city raised R1 billion for projects including electric buses, energy efficiency in buildings and water management initiatives.
As more investors see the benefits of green investing through the return profile of these investments, as well as the protection it can offer during volatile periods thanks to its enhanced governance, we believe there is healthy scope for responsible investing to grow in the South African market.
About the author
Donna Nemer is Director of Capital Markets at the JSE. She is responsible for all primary and secondary market activity across all asset classes, including the sourcing of new debt and equity listings and the development and on-going management of all secondary market trading. She also previously headed Citi Bank in South Africa.