Compared with traditional impact investment vehicles, which tend to be private equity, green bonds provide a “nice balance” in achieving a desired investment impact, environment, social and governance (ESG) advisory firm EBS Advisory CEO James Brice said during the Southern Africa Green Bonds Intensive webinar on September 23.
Private equity in Africa has traditionally taken the lead on pioneering infrastructure investments in markets that other investors would find too risky and is the only formal asset class that is investing in the small and medium-sized enterprise sector, he pointed out.
However, green bonds bring an important innovation in that they enable investors to access impact strategies within a liquid asset class, but focus on the ESG performance of the issuance and not necessarily the issuer, he said.
“This is a very important distinction – as long as the sectors and taxonomies and the monitoring and reporting are very thoroughly defined.”
From an issuer perspective, Brice said the benefits attained with getting access to a larger pool of investors, according to the research he has seen, point to 98% of green bonds in 2020 having attracted new investors who had previously invested in fixed-income products of this nature.
“It also diversifies your investor base, so it is spanning not just institutions, such as pension funds, but also asset managers with green mandates, as well as central banks,” he noted.
In diversifying an investor base and broadening the supply of capital, investors should be able to lower their cost of capital, said Brice, adding that other contributing factors to lowering the cost of capital is that green bonds have traditionally shown a larger book spread during the building process.
This can enable issuers to squeeze the pricing more efficiently and bring projects into feasibility, he added.
In terms of the corporate issuers, Brice said such investments generally get a share price spike when venturing into new territory, because the investment community “perceives that the issuer is on top of its game and anticipating future regulatory pressures, being a first- or early-mover and signalling to the investor market that the entity the issuer is preparing to protect revenues from climate change risks”.
“. . . investors are coming under increasing scrutiny to demonstrate their responses to various climate change scenarios, and issuing a green bond would be seen as a very proactive asset-protection measure,” he said.
To the investor, green bonds tighten more effectively than non-green equivalents in the secondary market, said Brice.
In this regard, studies on a seven- and 28-day cycle show roughly between 40% and 70% tightening of the prices in the secondary issuance, he pointed out.
Green bonds also demonstrate a lot of volatility in the secondary markets and are emerging evidence of greater liquidity, he added.
There are important benefits to investors and issuers looking at green bonds, Brice enthused.
However, overall, a lot of what he describes takes place largely on an international level, with the scenario in Africa, and particularly in South Africa, being slightly different.
According to the climate bonds initiative, developed markets comprised 76% of the green bonds issuance in the first half of this year, just 1% up against 2020, he said.
But the share of emerging market countries grew marginally from 18% to 19%, with no new issuances in Africa in the first half of this year, Brice pointed out.
Nonetheless, he said the markets are seeing some opportunities, especially in the public sector funding to address the United Nations Sustainable Development Goals (SDGs).
“If you look at the trends internationally, you see that just slightly more than 50% of global green bond issuances were from various forms of State entities, from asset-backed securities, loans, local government municipalities, to government-backed entities, sovereign bonds and development banks,” said Brice.
Going forward, he said, this might be a logical place for Africa to start in its endeavours to align itself with the SDGs.