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07 Jul 2020
BY James Brand , Jessica Blumenthal , Dean Rose AND Dalit Anstey

Impact investing: Accessing ESG Capital in the Debt Capital Markets

Environmental, social and governance (“ESG”) considerations are moving into the mainstream, both globally and in South Africa. Change is on the horizon. Recent amendments to the JSE Debt Listings Requirements further expand available opportunities for issuers to issue and investors to take up sustainability-linked instruments. This article explores this more recent ESG-related development in the context of a turning tide.

An opportunity for South Africa and Africa

The present global pandemic has placed many aspects of normal life on hold, but one aspect developing globally at a quickening pace is the concept of “impact investing”, based on ESG criteria, as the world looks to build back better. The question of how companies make their money is increasingly being asked of corporates by consumers and investors alike. This has led to unprecedented growth in ESG-related investments. The Global Sustainable Investment Alliance has found that global assets managed according to ESG strategies have more than doubled from 2012 to 2018, rising from USD13.3-trillion to USD30.7-trillion.

These pools of ESG capital are more easily accessed if there is a transparent and objective means of establishing whether the underlying reference asset is truly sustainable. For Africa generally, a continent that needs billions annually to meet the United Nations' sustainable development goals but that has limited resources to implement these goals on its own, the role of ESG appears to be an opportunity to unlock additional capital flows to African sustainable enterprises.

Setting the regulatory scene – focusing investors

South Africa is alive to this opportunity. From the start of the millennium, South Africa has been surveying and engaging with stewards of capital – pension funds, asset managers and other institutional investors – to better understand how ESG factors form part of, or should form part, of the allocation of capital and whether regulatory reform is necessary to drive this change.

Recently in May 2020 National Treasury published a draft technical paper: “Financing a Sustainable Economy” to propose a framework for financial institutions to better disclose public information on their green practices and investments. The paper is the result of a cross-regulator working group and includes recommendations on sustainable finance initiatives to be undertaken in banking, insurance, retirement funds, asset management and capital markets. The intention is to encourage the financial sector to play its role in sustainable finance and development.

Last year June, the Financial Sector Conduct Authority (“FSCA”) released a guidance notice on sustainability for pension fund trustees (PF 1 of 2019) (“Sustainability Notice”) which amplified the FSCA’s expectations of a pension fund’s reporting and disclosure against the principle enshrined in regulation 28 of the Pension Funds Act, 1956, that pension funds and their boards consider ESG factors when making or holding an asset. Albeit that pension funds are not mandated by law to invest a certain percentage of their assets on the basis of ESG factors, the Sustainability Notice encourages pension funds to address the sustainability of their assets in their investment policy statements and to either invest consistently in accordance with ESG principles or explain to their members why they are not doing so. As a result, when a pension fund appoints third party service providers such as asset managers, it must take such imperatives into account, resulting in asset managers frequently being required to contractually commit to the incorporation of ESG factors into their investment process.

Creating an environment for investable sustainable assets

As ESG becomes an accepted investment consideration in South Africa, focus is turning to accountability, better disclosure and the regulatory framework necessary to provide investable sustainable assets for the increasing pool of investors with ESG focused mandates.

The amendment of the JSE Debt Listings Requirements on 22 June 2020, effective 23 July 2020, expands the current green segment of the JSE’s Interest Rate Market launched in 2017 by replacing it with a broader sustainability segment on which a new class of specialist debt security – “sustainability instruments” – can be issued.

A sustainability instrument is one issued to finance one or more green, sustainable or social projects and is endorsed by an independent advisor confirming the classification of the instrument in terms of the sustainability standards. The placing document issued in connection with a sustainability instrument will provide investors with additional information in respect of how proceeds raised from the issuance will be managed and allocated to, and how the issuer will report impact from, eligible sustainable, green or social projects pursuant to the sustainability standards.

The sustainability standards refer to the Green Bond Principles (“GBPs”), Social Bond Principles (“SBPs”) and Sustainability Bond Guidelines:

  • The GBPs focus on the use of proceeds to support issuers in transitioning their business model towards greater environmental sustainability through specific projects, including:
    • renewable energy
    • energy efficiency
    • pollution prevention and control
    • sustainable management of natural resources and land use
    • clean transportation and
    • climate change adaption.
  • The SBPs promote integrity in the social bond market to increase capital allocation to social projects, including:
    • access to essential services
    • affordable housing
    • food security
    • employment generation
    • and socioeconomic advancement.
  • The Sustainability Bond Guidelines, based on the Sustainability-Linked Bond Principles, outline best practice for financial instruments purporting to incorporate ESG outcomes, where the role of key performance indicators and sustainability performance targets are important.

The independent advisor appointed by the issuer must issue a report confirming that the instrument is classified as a sustainability instrument pursuant to these sustainability standards. This report will be incorporated into the placing document for the sustainability instrument, confirming both to the JSE and investors that the instrument does in fact meet the sustainability standards. The report must also be available on the issuer’s website at least five business days before the issue date of the sustainability instrument. The report is important to ensure the integrity of sustainability instruments and avoid “green washing”. The advisor will need to be an entity that is:

  • independent from the issuer of the instrument
  • specialised in assessing the framework of the instruments’ sustainability objectives possessed of sufficient financial and market-specific expertise to perform a comprehensive assessment of the use of proceeds raised through the issuance of the instrument. Such expertise will be demonstrated through affiliation with relevant and widely recognised industry bodies acceptable to the JSE, in its discretion and significant and appropriate previous experience in providing external reviews on sustainability instruments.

In addition to the report of the independent advisor and the additional information to be included in the placing document, an issuer is required to confirm in its annual compliance certificate that the instrument continues to meet the sustainability standards and must publish any updates since the listing date in relation to any disclosures made in the listing documentation in respect of the independent advisor’s report. The issuer is obliged to ensure compliance with the sustainability standards on an ongoing basis. Any non-compliance must be reported to the JSE and remedied by the issuer within a period of 25 business days. Failure to remedy any non-compliance will result in the sustainability instrument becoming redeemable or being reclassified and transferred to a more appropriate sector in accordance with the listings requirements.

Perfect timing

These amendments come at an opportune time as South Africa seeks to attract capital for the significant infrastructure projects planned over the short and medium term. President Ramaphosa recently announced that South Africa is considering 276 infrastructure projects, of which 88 are near financial close and 55 are ready to begin construction within three months. The government itself is considering issuing a green infrastructure bond, hoping to raise the capital necessary to fund such projects.

For African (including South African) businesses and infrastructure projects, integrating sustainability with core business functions, while still maintaining competitiveness, is key to attracting the pool of investors with ESG focused mandates and the sustainability standards provide a useful benchmark for such self-assessment.

For legal queries relating to sustainability bonds and green finance, climate change, natural resources, pollution and waste, human resources, product liability, stakeholder opposition, corporate governance and corporate behaviour, please don’t hesitate to contact ENSafrica’s multidisciplinary team:

Jessica Blumenthal

Executive | Banking and Finance

jblumenthal@ENSafrica.com

+27 82 788 0352

James Brand

Senior Associate | Natural Resources and Environment

jbrand@ENSafrica.com

+27 79 877 7778

Dean Rose

Senior Associate | Banking and Finance

drose@ENSafrica.com

+27 72 275 0463

Dalit Anstey

Associate | Natural Resources and Environment

danstey@ENSafrica.com

+27 66 474 4466