Green bonds can help South Africa finance a just energy transition, but there are also challenges that must be mitigated as issuers and investors look to capitalise on the opportunities these bonds present.

This was indicated by speakers during the Financing South Africa’s Energy Transition’s webinar on August 10, supported by Agora and hosted by the African Climate Foundation and Climate Bonds Initiative.

The webinar marked the launch of the ‘Green Bonds in South Africa: How Green Bonds Can Support South Africa’s Energy Transition’ report, which provides insights to market practitioners in climate finance and renewable energy.

Presenting some findings of the report, Climate Bonds Initiative production and content head Bridget Boulle said the green bond market had seen considerable growth of late, with this year’s issuance almost at $250-billion.

The previous year’s issuance was affected by the Covid-19 pandemic.

Boulle outlined that, for issuers, the benefits presented by green bonds included access to a larger pool of investors; diversification of the investor base; a potential lower cost of capital; the stock price bounce; and a competitive advantage.

For investors, benefits include secondary market value and liquidity; lower volatility, especially in times of crisis; and emerging evidence of greater liquidity.

Boulle cited a recent survey conducted by the Climate Bonds Initiative, wherein 98% of respondents said their green bond attracted new inventors.

Moreover, 91% said a green bond facilitated more engagement with investors; 88% said they planned to issue more green bonds; and 70% said the demand for their green bond was higher.

Boulle pointed out that, within the sustainable finance market, green had been traditionally dominant; however, the 2020 Covid-19 crisis resulted in a significant increase in social bonds.

This year, however, the social theme had been less prominent, she noted.

Looking at South Africa, specifically, Boulle said there had been growth in green bonds, but it had been “patchy”.

She highlighted one notable bond as the Cape Town bond, which was picked up around the world owing to the timing, with the city undergoing a water crisis during a period of resilience focus.

Boulle also highlighted that there were pioneers of green bonds in the country, with Nedbank, for example, being a regular issuer.

While large emitters can use climate finance to finance a credible and ambitious transition, Boulle emphasised that there were several factors underpinning this transition.

This includes a clear definition; time-based pathways and milestones; and clearly defined phase-out periods for current energy sources.

Boulle pointed out that there were a range of financial tools available, including key performance indicators-linked instruments; and green or transition bonds.

For an activity level transition, green or transition bonds are viable.

These can be used to finance the transition away from stranded assets towards new technologies, such as hydrogen or renewables.

These could also be applicable to repurposing or early decommissioning of existing infrastructure.

Boulle indicated that high-emitting entities increasingly needed to articulate a credible strategy with regard to this transition.

For entity-level transitions, equities, general purpose bonds and sustainability-linked bonds are viable.

Boulle said that, for example, for State-owned power utility Eskom, it could continue to run coal while attracting transition finance, if its strategy is credible and is being implemented. 

The report can be accessed at: https://www.climatebonds.net/resources/reports/green-bonds-south-africa-how-green-bonds-can-support-south-africas-energy.