Unlike more developed jurisdictions, African financial institutions’ interest in environmental, social and governance (ESG) initiatives has largely centred on social issues.
“From a pan-African perspective, there is probably more of an emphasis on alleviating social issues,” said Herbert Smith Freehills partner Rudolph Du Plessis. “That doesn’t mean institutions aren’t interested in environmental deals, but regulators throughout the continent are highly focused on the implications for employees and society.”
This is most tangible in South Africa. The Companies Act states ‘that a company or a category of companies must have a social and ethics committee, if it is desirable in the public interest’. This had led to public companies bringing matters within their mandate to the board, with a need to also disclose to shareholders.
“It certainly places ESG issues on the board's radar,” continued Du Plessis. “It makes the board consider the impact of all its business activities on the environment, as well as the development of communities in which its activities are conducted. From that point of view I am sure that it encourages more impact investing.”
ESG initiatives are beginning to become mainstream in African finance, with the issuance of two landmark bonds on the London Stock Exchange;
Market participants say that the focus has been more on social impact, as opposed to climate change, which has been the priority in European finance;
Soft law and international frameworks are drivers for better sustainable finance in the region.
Other market participants added that domestic and international investors generally have differing priorities.
“International capital tends to prioritise climate change, while local capital tends to focus on social challenges,” said Dean Alborough, head of ESG at South Africa-based Old Mutual Alternative Investments (OMAI). He believes this is due to the very immediate social needs such as poverty that dealmakers have to address in emerging markets. “In comparison, climate change can incorrectly be perceived as a more distant, intangible issue.”
Alborough added that because of significant social challenges, domestic investors tend to be focused on what directly impacts their communities today – but that there is a dire need to create projects addressing climate, social and other sustainability matters.
Last week the African Development Bank launched a record-breaking $3 billion social bond (the Fight Covid-19 bond) on the London Stock Exchange. The landmark transaction is largest US dollar-denominated social bond to date. The three-year bond is intended to help remedy the social impact that the Covid-19 pandemic will have on Africa’s economies. The bond was allocated to financial institutions with 37% of allocations in Europe and 36% in the Americas. Eight percent was allocated to African investors.
This followed Standard Bank’s late February green bond issuance, again on the London Stock Exchange. The bank sold a $200 million green bond to the International Finance Corporation – which is the largest sale of its kind from the continent yet.
“This bond issuance was a deliberate and considered process, aligned with Standard Bank’s strategic intent and value drivers,” said Nigel Beck, Standard Bank’s head of sustainable finance, adding that the ultimate aim for the company is to become the leading sustainable finance business unit in Africa. “Our inaugural issuance, and the greater Standard Bank sustainable bond framework, were designed to ensure this was not an isolated issuance. The intent is to issue bonds that are green, social and sustainable on a repeated and programmatic basis.”
February’s bond followed Standard Bank’s role as arranger on East Africa’s first green bond issuance, which took place in Autumn 2019. Issued by property developer Acorn Group, the bond was locally denominated and intended to project finance environmentally friendly student accommodation in Kenya’s capital Nairobi.
“There tends to be more progress in this space in developed markets and, unfortunately, the rest of Africa lags behind South Africa,” Beck continued, adding that one issue is the lack of depth and liquidity in local capital markets. “This was the case with Kenya’s inaugural green bond where a key challenge was overcoming the stagnant corporate bond market in East Africa, while at the same time crowding local institutional investors into what was a novel corporate green bond structure.”
The Kenyan corporate bond market had only seen one other bond issuance prior to the Acorn MTN. “Regardless, it has gained acclaim and proven a good instrument in showing how the East African capital markets can capitalise on the sustainable finance space,” said Beck.
Beck added that the European market has evolved more in this space – which has meant that greenwashing remains somewhat of a sensitive issue in African finance. “The market is not yet mature enough to fully differentiate what is greenwashing and what isn’t,” he said, warning that clients are still grappling with environmental and social risk, having limited experience of sustainable products.
To alleviate this risk, the bank ensured that its green bond was issued and certified through a second party opinion, to be in line with the green bond principles and sustainable bond guidelines that have been outlined by the International Capital Market Association.
Greening emerging markets
While greenwashing remains a risk for African markets, some market participants are more optimistic about the opportunities that can be found in this space.
“A key difference between developed and emerging markets is that while developed markets are dealing with infrastructure that can currently be classified as brown, in emerging markets such as Africa, investment is going into creating infrastructure that does not yet exist,” said Shrey Kohli, head of debt capital markets and funds at London Stock Exchange. “This presents the opportunity for these markets to leapfrog developed markets by investing directly in green infrastructure.”
Soft laws such as those introduced as part of the 2016 Paris Agreement, as well as the risk management framework set out in the Equator Principles, remain on the agenda for financial institutions operating in Africa.
"Climate change can incorrectly be perceived as a more distant, intangible issue"
“The days when multinational companies applied different standards to developing countries to the standards they apply elsewhere are, on the whole, numbered,” said Herbert Smith Freehills partner Rebecca Major. “As well as reputational and risk issues, and risks of claims against them in their home jurisdictions, investors are strongly aware that they will not be able to obtain financing from international banks without complying with strict international standards.”
Kohli added that international banks with strong ESG standards are keen to give the private sector access to the market through loans, partial guarantees, credit enhancements and cornerstone investments.
Beck added that the South African Banking Association is holding discussions about the EU Taxonomy on Sustainable Finance and added that at present, Standard Bank is trying to map local work in alignment with the standards. This would echo other international players, such as those in Japan and the US.
“There has been no decision made yet, as we need to ensure it makes sense to be operationalised here, as there are nuances between our market and those in Europe,” Beck continued. For instance, the technology and market infrastructure simply are not there yet. “I think that transition bonds could help address that gap. Not everything can be pure green, yet there is a need for companies who are not seen as green to move in the right direction.”