Although the green bond market is still in its infancy, accounting for less than 0.5% of the global bond market according to Moody’s, it is experiencing strong growth and increased popularity – especially in emerging markets most at risk of climate change.

“There is increasing investor and consumer demand for green-branded financing and projects. The most forward-thinking banks and institutions are already focusing on solutions to the environmental sustainability problems of the future,” says Louise Campbell, partner in the Banking and Finance Department at Pan-African law firm Bowmans.

Green bonds are debt capital instruments used to raise financing for environmentally sustainable projects, such as green property, renewable energy and pollution prevention.

Young SA market with room to grow

South Africa’s official green bond market is not even a year old: the JSE launched its Green Segment in September 2017. One of the first local companies to enter the market is Growthpoint Properties Ltd, which in March 2018 issued notes worth ZAR 1.1-billion to refinance certain green properties.

“According to the JSE, the green bond market worldwide is currently valued at around USD 895-billion,” says Campbell, who acted as Growthpoint’s legal counsel on its ground-breaking green issue.  “It is clear there is plenty of room to grow. At present, the primary benefits of entering the green bond market are reputational and environmental, but cost benefits could come as the market grows and investor appetite increases.”

An important difference between the South African and other markets is that the Green Bond Principles published by the International Capital Markets Association are binding on companies that list green bonds on the JSE – unlike the situation elsewhere, where they are simply voluntary guidelines.

This is because the JSE has incorporated the Green Bond Principles into its Debt Listings Requirements, making them mandatory for any issuer intending to launch a green bond. In some respects, the JSE requirements are more stringent than the principles, Campbell says. For example, issuers on the JSE are required to appoint an independent advisor to confirm the green status of the bond, whereas external review is merely a recommendation in the principles.

How SA issuers must comply

Campbell says there are four components of the Green Bond Principles, which aim to promote transparency, disclosure and integrity in the green bond market. They are: the use of proceeds; the process for project evaluation and selection; the management of proceeds; and reporting.

Use of proceeds: The funds raised under a green bond must be used exclusively to finance or refinance projects with clear environmental benefits. Each bond must state clearly how the funds will be used, indicate the extent of planned financing or refinancing and identify a green project eligible under the principles. Key eligible areas include renewable energy, energy efficiency, pollution prevention and control and climate change adaptation. The issuer must assess and, where feasible, quantify the environmental benefits of the green project.

Process for project evaluation and selection: To promote transparency for the benefit of potential investors, issuers should explain why their chosen projects are eligible for green bonds and should detail the projects’ eligibility criteria and environmental sustainability objectives. In addition the JSE Debt Listings Requirements make it compulsory for issuers to appoint an independent advisor to confirm the green status of the bonds.

Management of proceeds: The principles recommend a high level of transparency in the tracking and allocation of funds raised under a green bond. Investors should be made aware of issuers’ formal internal processes for managing the allocated and unallocated proceeds. The JSE requires specific disclosure around the management and allocation of funds.

Reporting: Issuers should keep and disclose information on the projects selected and the amounts allocated to them. Qualitative and quantitative measures of performance are encouraged, as is assessment by the issuer of the expected impact of funds allocated.

Campbell says the early green bond adopters in South Africa, such as Growthpoint, appear to have done well in using the Green Bond Principles and are setting the tone for more corporate issuers to follow. “Increasingly, corporates are looking ahead to the future and seeking environmentally sustainable solutions. Green bonds will undoubtedly be part of that landscape,” she concludes.

Written by Louise Campbell, partner, Banking and Finance Department at Bowmans