What are Green bonds?
Green bonds (also referred to as Climate Bonds) are like typical bonds but their distinguishing feature is that the proceeds of the bond are ring-fenced and exclusively allocated to support “green projects” aimed at mitigating climate change and promoting energy efficiency, pollution prevention, sustainable agriculture, clean transport, and the cultivation of environmentally-friendly technologies. Green bonds are typically asset-linked and backed by the issuing entity’s balance sheet. As such, they usually carry the same credit rating as their issuer’s other debt obligations.
Green Bonds provide an alternative investment opportunity
Green bonds provide institutional investors with a means of accessing sustainable investments in the fixed income market in a familiar, low-risk vehicle and provide municipalities with an ideal opportunity to develop PPP’s to accelerate the advancement of new technologies and energy efficiency. Furthermore, Green bonds align with the growing emphasis on environmental, social and governance (ESG) elements by investors.
Growth in the Green bond market in South Africa
While Green bonds have historically been issued by multilateral lenders such as the World Bank, the African Development Bank and the European Investment Bank, corporates across a range of areas (such as Unilever, Apple and Toyota) as well as sovereign issuers (for example, France, Poland and Indonesia) have issued Green bonds and capitalised on the ability of Green bonds to provide access to a wider range of investors.
Green bonds are also beginning to feature more prominently in South Africa.
- In 2017, the JSE launched its Green Bond Segment. This segment was initially ring-fenced for low carbon initiatives to enable investment in securities that contribute to sustainable development and a low carbon economy. In July 2020, it was expanded to a fully-fledged Sustainability Segment and issuers can now also list social and sustainability bonds.
- In 2019, Nedbank became the first bank in South Africa to list a renewable energy bond on the green segment of the JSE. Nedbank’s two 2019 renewable energy bonds (placed for R1.7 billion and R1 billion respectively) were significantly oversubscribed. In 2020, Nedbank listed a further bond on the Green Bonds segment of the JSE, in the amount of R2 billion.
- In February 2021, the Development Bank of Southern Africa (DBSA) issued its first green bond in the amount of R3,59 billion. The proceeds of the DBSA bond issuance will be applied to projects that contribute to climate mitigation and adaptation and are aligned with South Africa’s National Development Plan’s objective to transition to a low carbon economy.
Green bonds represent a substantial and rapidly growing market (Moody’s estimate is that green bonds to the value of $375 billion will be issued in 2021) as well as providing investors and issuers with an opportunity to encourage sustainable growth in the economy through an innovative and climate-change sensitive financing mechanism.
Times they are changing….
This article is the second of a short series of articles to be published by the firm on green financing.
Co-authored by: Uzair Bulbulia