How SA can cultivate its green bond market

SA is at a tipping point. The reality of climate change demands a staggering $2.8-trillion annually by 2030 for adaptation efforts in Africa. Yet an opportunity for a sustainable future beckons. Green bonds, a financial instrument specifically for environmentally friendly projects, offer a meaningful option. However, the SA green bond market is young and underdeveloped.

To unlock its potential and empower a greener tomorrow, a multipronged approach informed by recent research is urgently needed. According to Judith Tyson of the global affairs think-tank ODI, green bonds have proven to be one of the most effective financial instruments in raising funds and reporting on their use. Unfortunately, there has been a slow rate in issuances and a slow take-up by institutional investors in particular, which limits the ability to crowd in private capital.

The first step on this path to a sustainable future is understanding investor priorities. There is limited research done on the green bond market globally, far less in Africa and even less in SA, one of the fastest growing emerging economies. Thus there is a need to conduct far more primary research to explore and analyse pertinent questions shaping this field and to develop data sets that are comparable to other emerging and developed markets.

Our recent study published in the SA Journal of Business Management provides valuable insights. While traditional factors like creditworthiness and pricing remain important, green credentials — the demonstrably positive environmental impact of a project — are equally crucial for investors.

The current leniency on post-issuance reporting is likely to tighten as the market matures, so prioritising transparency from the outset is key to building trust with investors.

Building a robust pipeline of green projects is another critical step. Our research showed a strong desire from stakeholders for government support. This support could come in the form of guarantees, subsidies and tax breaks that incentivise green investments. Additionally, implementing removing subsidies for continued investment in fossil fuels would send a clear message about SA’s commitment to a sustainable future.

SA was been an early adopter of green bonds as early as 2005 with the City of Johannesburg issuance. The Development Bank of SA has collectively issued about R7bn in green bonds and there is an increasing rate of issuances on the JSE.

The good news is that SA is not alone in its green bond market ambitions. Comparisons with established green bond markets in Southeast Asia, Europe and the US show key similarities. This allows for strategic adaptation of successful strategies from these markets. For instance, mirroring Europe and the US by emphasising competitive pricing and strong alignment to sustainable objective will attract investors and make the SA market more attractive.

But simply mimicking established markets is not enough. Policymakers must take a proactive role in fostering the growth of the green bond market. The recent green bond taxonomy by the Treasury and the increase in issuances seen in the last three to five years is a positive step, but it needs to be followed by further measures. Subsidies for reporting costs, for example, could incentivise participation from a wider range of issuers.

Increasing adoption of the International Sustainability Standards Board’s new reporting standards can also elevate the status of issuers by demonstrating transparency and accountability.

Our approach should be responsive to the deep socioeconomic issues SA faces, whether that is access to quality drinking water, affordable energy security and economic growth in tandem with standards and regulations that support development of the country and the region.

The urgency to act cannot be overstated. The effects of climate change are already being felt across the globe, and SA is not immune. By addressing the deterrents that currently hinder the green bond market, creating attractive incentives and learning from international best practices, SA can create fertile ground for a thriving green bond market. This, in turn, will attract local capital, bolstering the country’s climate change response strategy and creating a more attractive market for international investors.

There is immense potential to use green bonds to catapult the $8.5bn funding that has been committed for SA’s energy transition by and additional funding for the region via the Green Climate Fund. The financial resources raised through green bonds can be channelled into critical renewable energy projects, sustainable infrastructure development, and climate-resilient agriculture — all cornerstones of a greener, more resilient SA and Africa.

The stakeholders across the SA financial landscape — the JSE, Treasury, Asset Managers Forum and individual investors — share a strong interest in fostering a robust green bond market. Now is the time to turn this interest into action.

By seizing this opportunity and working collaboratively SA can plant the seeds for a greener, more sustainable future. The time for deliberation has passed; the time for action is now.

• The authors are affiliated with the Stellenbosch Business School at Stellenbosch University, but write in their personal capacities.