Bruce Stewart of Nedbank CIB explores some of the ways in which we can use investments to do good with – specifically by innovating financial models with a long-term focus on sustainability as well as harnessing the power of green bonds.
Why the focus on sustainability?
A focus on sustainability delivers an improved risk adjusted return for both equity and debt investors with investors using sustainability filters to guide their investment decisions. This focus needs to be communicated to all stakeholders. Capital markets are not adequately pricing the ultimate cost benefit surrounding sustainable business. With long-term success in mind, stakeholders are increasingly turning towards ESG criteria to assess performance across non-financial sectors. ESG criteria assist stakeholders to assess the unmeasured environment, social and governance topics when making investment, supply or purchase decisions. It reveals data that traditional finance and financial analysis doesn’t usually capture and speaks to the sustainability of a company as well as how the relationship might also benefit stakeholders. From an investor’s perspective, ESG is incredibly valuable. The case for ESG investment is tangible and corporates in South Africa should increasingly be looking to align their internal ESG efforts with external recognition. The journey to embrace sustainability varies across entities and sectors. But, the benefits, which may seem self-evident to some, are not broadly understood by all. We all have a role to play in creating awareness and driving action towards achieving a sustainable future.
2008 saw the first Climate Awareness bond and the World Bank’s Green Bond driven primarily by climate change. Green was the predominant focus in this world of sustainability. Sustainability is an umbrella term which overarches ESG and equivalent issues. The first social bond principles were issued by ICMA in 2018. Now we have a maturing market, which not only talks to bonds but to loans and all sorts of financing instruments. The ECB announced that sustainability-linked bonds using environmental KPIs were eligible as central bank collateral from January 2021. Transition bonds are also beginning to emerge to finance projects and facilitate the transition towards the low-carbon economy. There has been an exponential evolution of primary sustainable issuance, which now exceeds $1.3t. The total issuance in 2020 reached around $494bn, well over 2019’s overall supply, boosted by Social Bond issuances on the back of Covid-19. Forward-looking companies are addressing sustainability within their operations by bridging the gap between sustainability and finance. Companies leveraging innovative financial instruments, such as green bonds, enable capital raising and investment for new and existing projects with environmental and social benefits. Leading financial institutions are playing a crucial role and one of Nedbank’s stated objectives is to drive product innovation and capital allocation to sustainability related initiatives. As key intermediaries channelling investment towards sustainability projects, debt capital markets and sustainability finance teams are supporting their clients in developing sustainable bond frameworks and methodologies to approach the world of sustainability. It’s important to profile what you’re doing to create awareness in order to drive your ethos to stakeholders
Sustainability financing – where do you start?
If you’re going to be financing, you have a choice. You can either go sustainability linked or ‘use of proceeds’. Sustainability linked generally incentivises the borrower to improve its sustainability profile. The instrument features reference the sustainability profile of the borrower, which can be determined by Key Performance Sustainability Targets, linkage to an external environmental,
social and governance rating or score assigned to the borrower. There is an external review element. Green / social / sustainable ‘use of proceeds’ links to a specific use of proceeds. In the case of green, this aligns with the global green agenda and ideally the Paris Climate Accord. The funds need to link to dedicated green or social or sustainable projects and a clear ‘use of proceeds’ needs to be defined. There is an external review element to this route, which requires ongoing monitoring and reporting.
Nedbank was the first bank in South Africa to establish a green bond framework and has successfully executed on 3 domestic green bond issuances over the last 5 years. Nedbank undertook a non-deal roadshow in October 2018 and based on feedback structured a use of proceeds senior unsecured bond linked to renewable energy projects. A deal roadshow was concluded in mid-April 2019 with local investors and calls were hosted with around 15 international investors, which informed the final auction terms to be offered to the market. They successfully issued their pioneering renewable energy green bonds in April 2019, which attracted a 3.28 times oversubscription rate in an auction process. The issuance assisted in the development of the green bond market and has created momentum for further issuances. Impact investor participation assisted with spread tension and appetite in the longer 7-year tenor tranche on offer. Additional liquidity was unlocked from infrastructure funds in addition to the normal fixed income mandates run by local investors due to the underlying green infrastructure assets being referenced. More and more we’re seeing there is a ‘greenium’ or green premium that investors are prepared to pay if the credibility behind these instruments is suitable.