Listed ESG bonds getting greener, but SA adoption is slow

26 APRIL 2022

Listed ESG bonds getting greener, but lag rate of global issuance

By Nigel Beck

Last year, the South African debt capital market saw the listing of its first social and sustainability-linked bonds (SLBs). These follow the first green bond issued a few years prior, in a growing trend by businesses to align their financial and sustainability strategies. While it is clear there are differing levels of sophistication across the market, South African investors are increasingly proactively engaging with companies on improving their sustainability profile.

Of the R15.7bn SA-listed ESG bond issuance last year, SLBs represented R8.7bn, while green bonds and social bonds accounted for R3.5bn each. The growing popularity in South Africa was against an international backdrop of rapidly growing SLB issuance that doubled in 2021 when compared to 2020, reaching a total of just over $1.1trn (~R15trn).

The issuances took place across all the key credit sectors – banks, corporates, state-owned entities (SOEs) and securitisation. Approximately half of last year’s ESG issuances were placed in the market through auctions. Notably, only one SLB auction took place. All of the social bonds were issued through public auctions with green bonds a mix of both private placements and public auctions.

Rand Merchant Bank Markets Research conducted a survey to better understand South African investors’ perceptions towards this fast-developing part of the market.

When it comes to investor popularity, green bonds are currently the most represented (61.9%) with respect to bids, followed by sustainability-linked bonds (42.9%).

But ESG bond adoption is still slow in South Africa. Issuance has been hampered by South African issuers understanding of their benefits and also concerns about costs. Offshore services providers are often used to provide pre issuance verification or second party opinions which is a cost borne by the issuer. Despite this, there is a very large appetite for green bonds from South African investors. On balance it makes issuing green bonds worthwhile.

The research showed that credit quality matters. When investors who bid for ESG paper were asked to substantiate their rationale for participation, fundamental credit quality of the name superseded other motivations. Notably, ESG mandates did not inform their decision.

Measuring returns and impact of sustainable funding is an important challenge. Reporting has been labelled as ‘extremely important’ by about 60% of respondents. Investors believe that issuers should report the direct and indirect impact funding results.

Investors shared the view that 100% of issuers are issuing ESG bonds in order to capitalise on market trends and only half of the issuers are putting consideration into making a difference. Issuers and arrangers need to be cognisant of these factors, but a way of rectifying this is by providing clear guidance of targets versus historical performance. Global trends and comparable numbers also form a good benchmark.

Looking ahead, transition bonds, a new asset class targeted at industries with high greenhouse gas emissions, are expected to take off in popularity in South Africa this year.

They are designed to help “brown” companies, meaning those with a high carbon footprint, to transition to greener business activities. Many of these companies are increasingly excluded from existing markets for sustainable finance. The adoption of transition bonds will be transformative for corporate South Africa.

Beck is Head of Sustainable Finance and ESG Advisory at RMB