Let’s bond over green bonds

South Africa

This funding method can help move forward SA’s just energy transition goals.

As the world grapples with the urgent need to reduce carbon emissions and mitigate the effects of climate change, green finance has emerged as a powerful tool for driving investment in sustainable energy and infrastructure. Green bonds have gained traction as a means of raising capital for climate mitigation projects while providing investors with a source of reliable return on their investment.

The bonds can help move forward SA’s just energy transition (Jet) goals by reducing debt burdens, attracting international capital and offering a competitive advantage to access a large pool of international investors focused on sustainability. They can also be a vital tool in harnessing the increasing investor appetite for investments with green and social effects.

Why green bonds?

Green bonds are bonds used to raise capital for projects that have a positive effect on the environment, ranging from renewable energy plants to energy-efficient buildings, sustainable agriculture and clean transportation.

Green bonds are typically subject to voluntary or mandatory certification frameworks, such as the Green Bond Principles established by the International Capital Markets Association (ICMA), which recommend using a form of certification.

Green bonds have thus gained popularity as a means of attracting investment from institutional and retail investors who are seeking to align their investments with their environmental values and support the transition to a just and low-carbon economy.

More investors need to think green

The reliance on conventional energy generation has proved to be unsustainable as the demand for electricity is higher than the supply of the national electrical grid. Renewable energy offers a reliable and sustainable power supply, fuel diversification and enhanced energy security while reducing the risk of fuel spills and dependence on imported fuels.

SA has a UN-mandated obligation to produce more green energy, as stated in UN Sustainable Development Goal number seven, which aims to ensure affordable, reliable, sustainable and modern energy for all to achieve global climate goals. SA’s Jet initiative in turn aims to achieve net zero carbon emissions by 2050 with increased sustainable jobs. Jet seeks to ensure a gradual movement towards lower carbon technologies without negatively affecting society, jobs and livelihoods.

Various SA financial institutions have already issued green bonds. In February 2021, the Development Bank of Southern Africa (DBSA) issued its first €200m green bonds, structured in alignment with the DBSA’s Green Bond Framework and governed by French law.

The bonds were issued through a private placement with the Agence Française de Développement, and the proceeds were applied to projects that contribute to climate mitigation and/or adaptation, aligned with the UN Sustainable Development Goals and SA’s National Development Plan’s objective of a low carbon economy.

Standard Bank and Investec have also issued green bonds, the latter in April 2022, backed by five flagship renewable energy projects, including solar and wind projects, which offer a stable source of power generation for the country.

In June 2020, the Treasury set up the Sustainable Finance Working Group to establish the norms and standards that are needed for the development of sustainable finance instruments and products. Its objectives are to map the universe of such instruments and products globally; understand the relevance, appetite for, and applicability of these instruments to the SA financial markets; and recommend the enabling environment for sustainable financing to grow and support investment in sustainable development. Their activities are therefore crucial for the further development of a green bond market in SA.

Beware! Greenwashing ahead

Green bond issuers and investors are not immune to allegations of greenwashing, the term used to describe a scenario where bonds are labelled as “green”, though in practice their proceeds are not used for projects that promote environmental sustainability.

To address this challenge, the ICMA and the Climate Bonds Initiative have provided guidelines that describe the criteria and standards that must be met by the issuing entity to ensure the funds raised through the bond are used for environmentally sustainable projects.

These principles aim to provide transparency, accountability and credibility to the green bond market, and ensure the funds raised are used for the purpose intended. These criteria pose another challenge for SA, namely identifying environmentally sustainable projects that are economically viable and meet the stringent criteria set forth in green bond principles.

A green future

South Africans are no stranger to the effects of climate change, recurrent blackouts and water scarcity. Green bonds provide a promising financing option to facilitate the transition towards a low-carbon economy.

Through investments in renewable energy, initiatives that promote energy efficiency, and sustainable agriculture, companies and financial institutions can not only support a reduction in carbon emissions but also find relief in cost savings and benefit from an enhanced reputation.

Financial institutions and finance lawyers play a critical role in facilitating the growth of the green bond market. By collaborating with stakeholders in the financing sector finance lawyers can support the growth of the green bond market and pioneer a transition to a zero carbon economy.

With the success of some green bonds that have been issued in SA there is a glimmer of hope for the country’s energy and environmental challenges. There may just be real light at the end of the tunnel. While SA’s greylisting by global financial watchdog the Financial Action Task Force may seem like a formidable obstacle to overcome, with the right investment and legal support and framework we may find that green is indeed the new black.