By Akshar Sewkuran – Bonds Specialist in Capital Markets, Johannesburg Stock Exchange
Climate change as a systemic risk to global economies has led to an increasing demand from investors for socially responsible investment opportunities to address their environmental, social and governance mandate.
Green bonds raise money that is specially allocated for funding projects that result in environmental and climate benefits. While making up only a fragment of the global capital market, they have increased in terms of issuer diversity, number of issuers and investor involvement. The market for green bonds is valued at more than $900billion and the year-on-year issuance has doubled in size annually over the past three years and is expected to grow by a further $250billion in 2018.
The launch of the new Johannesburg Stock Exchange (JSE) Green Bond Segment in September 2017 has led to an increased appetite from investors. These are bond instruments where proceeds will be exclusively applied to finance new or existing eligible green projects and which are aligned with the four core components of the Green Bond Principles, as defined by the International Capital Market Association. The local market has just four green bonds listed, the most recent of these – the City of Cape Town’s earlier this year – was five times oversubscribed and the first corporate issuer Growthpoint was close to three times oversubscribed.
For issuers, the green bond market can offer several important benefits for green investment, including diversification to investors who are increasingly demanding socially responsible investment (SRI) opportunities. This could assist issuers tapping into offshore pools of capital and creating additional demand for their bond issuances. There are possible cost advantages as the market develops more fully – an interesting dynamic, which many issuers give as the rationale for listing a green bond. However, the cost advantages in developed markets seem to only appear after three years of a fully functioning market and, even then, the benefits are difficult to attribute to the green aspect.
What has become certain is that oversubscription is observed frequently, book builds are done relatively quickly, no new issuance premium is also prominent, as is the ability to up-scale volume issued. What is becoming more prevalent is the activity in the secondary market, whereby green bonds are trading tighter spreads – assisting the primary market issuances’ pricing, as well as studies showing that green bonds are proving to be more resilient during credit volatility. This allows issuers in less environmentally-friendly sectors to take part in the green bond market by signalling changes to their business model and attracting a new basket of ESG-focussed investors. This has become significant for issuers who are now able to monetise and receive benefit from the capital markets for their sustainability efforts.
Addressing climate risk
For investors there are a number of benefits – namely, being able to support the capital flow towards a responsible real economy that addresses the risk of climate change; investors have the ability to add investments into their portfolios that diversify the risk of climate-related changes; and it helps them meet ESG mandate requirements through a single-listed financial product.
As an example, French energy giants have resorted to issuing green bonds to help finance a strategic shift toward renewable energy. This complements mandatory ‘real economy’ policies that lead to changes in business models, such as carbon pricing, waste reduction and recycling targets. Finally, listing a green bond could enhance the reputation and promote the importance of governance of an issuer. Positive press coverage, both locally and abroad, greeted the green bond listings by Growthpoint, City of Joburg and City of Cape Town.
For investors, green bonds have become one of the main outlets for a growing pool of international capital that comes with environmental or ethical strings attached. The Global Sustainable Investment Alliance estimates that $10.4trillion in assets worldwide involves some form of ESG measurement.
Sustainable finance is being forced into the mainstream and we believe there is significant potential for growth in South Africa. The Pension Funds’ Act Regulation 28 requires that investments have to include ESG considerations in their investment portfolios – and a green bond is a product that speaks directly to this requirement.
The JSE has ensured that its green bond listing requirements are aligned with international best practice. With the global growth in this field, we have seen that green bonds give issuers the ability to attract new investors with a socially responsible investing (SRI) or ESG focus and tap growing pools of SRI capital. As more investors see the benefits of green investing through the return profile of these investments, as well as the protection it can offer during volatile periods thanks to its enhanced governance, we believe there is healthy scope for responsible investing to grow in the South African market.
Although the green bond market is still nascent in South Africa – with many potential issuers unaware of the benefits of tapping the capital markets with a green bond – the JSE ‘expects it to continue developing, with corporates playing a catalytic effect by using the capital markets to fund their low-carbon initiatives and, importantly in the context of South Africa, securing a low-carbon economy that secures jobs and investments’.
Growthpoint — a case study
Growthpoint Properties was the first South African company to issue a green bond on the Johannesburg Stock Exchange on
9 March 2018. The international property company, which owns and manages a diversified portfolio of 559 property assets locally and internationally, has issued R1.1billion($94million) bonds for terms of five, seven and 10 years. They will be used to fund the green buildings and green initiatives of South Africa’s leading real estate investment trust (REIT).
The issue was very successful – three times oversubscribed – and the company increased the issue size to ZAR1.1 bn. In terms of pricing, the issue provided GrowthPoint with a benefit in terms of pricing as follows:
- The five-year note was five basis points (bp) better than Growthpoint’s last plain vanilla issue
- The seven-year note was one bp better than its last issue
- For the first time ever, it was able to tap into the 10-year maturity via a public auction and attributed that to the fact that it was a green bond
- The issuer was also able to diversify its investors and attracted an anchor international investor in the 10-year tranche
The green bonds are priced at 139bp (1.39 per cent) for the five-year term, at 169bp (1.69 per cent) for the seven-year term and at 200bp (2.00 per cent) for the 10-year term above three-month Johannesburg Interbank Average Rate.
“Sustainable finance is being forced into the mainstream and we believe there is significant potential for growth in South Africa”
Delia Patterson, Senior Transactor for Debt Capital Markets Distribution at RMB, the lead arranger of the bonds, commented: “Investors appreciate the additional level of oversight that is provided to meet the green classification criteria and this usually results in stronger appetite at better pricing than the nominal bonds. Through this issuance, Growthpoint has successfully positioned themselves as a world-class property fund clearly committed to supporting and investing in environmental sustainability, with their green bond framework and reporting commitment attached to the bonds issued, and with the longest 10-year bond maturing in 2028.”
Among the investors in the new Growthpoint Green bonds is the African Local Currency Bond Fund (ALCB Fund), an initiative of KfW Development Bank and the German government – backed by additional investors. It aims to promote the development of African capital markets by acting as an anchor investor in primary bond issuance. It has invested around $70million since inception in 13 countries. In addition to anchor investments, the ALCB Fund offers technical assistance to cover transaction-related costs, including compliance with international green bond standards.
Karl von Klitzing, chairman of the board of the ALCB Fund, said: “We are delighted to be investing in Growthpoint’s inaugural green bond and to be supporting the sustainable real estate sector. As the first corporate green bond issuance in Sub-Saharan Africa, it represents a milestone for the market. Growthpoint has developed a comprehensive framework with the Green Building Council of South Africa to ensure investors are well-informed of the environmental impact of its green buildings. We hope to contribute towards improved reporting standards as a catalyst for further green bond issuance in renewable energy, housing and infrastructure sectors.”