There is a tangible shift in the world towards sustainability and a greener future. We can feel it, we can see it and it has been accelerated by the rise of COVID-19. Now, the powerhouse countries of the world have decided on specific carbon emission goals for the future and they’ve mapped out plans to achieve this. Climate change simply cannot be ignored and, as the globe turns its focus towards a greener future, many corporates know they need to follow suit. The face of investment is changing and a company’s overall value proposition is being redefined to include sustainability as a top priority. In light of this, investors often require an ESG strategy, which refers to Environmental, Social and (corporate) Governance. In other words, a look into the company’s social responsibility. In a similar vein, green bonds are becoming more popular as companies need access to funding for projects that deliver environmental benefits and work towards sustainability. Here are 5 important factors you should know about ESG and green bonds.
The Green Bond Market in SA
The green bond market came into existence globally 14 years ago and South Africa then launched their first green bond 4 years ago. The Development Bank of South Africa (“DBSA”) launched a huge green bond totalling R3.59 billion recently, in order to fund the bank’s projects that are focused on climate change. DBSA Chief economist Zeph Nhleko has expressed that South Africa’s economic recovery from the pandemic will be largely centred around going green, much like the rest of the world. Last year, Patricia De Lille said that the presidency’s public works ministry and infrastructure investment office began liaising with the JSE with the goal of launching a green bond for this very purpose. An economic recovery that is focused on infrastructure could be just what South Africa needs to get on track towards sustainable development and a greener future.
Green is growing rapidly
The green bonds segment has grown into an enormous $128.3 trillion contributor to the global bond market. Green bonds are used for the likes of renewable energy projects, the construction of energy-efficient buildings, investments in clean water or transportation and so on. Green bonds fall under the overarching segment of sustainable bonds and huge global brands like Apple and Pepsi are leading the way in this regard, alongside countries like China, the European Union and Russia, who are issuing sustainability bonds in numbers. So, the green bonds sector is growing quicker and quicker, and in 2021 the issuance of new bonds may even reach $650 billion globally. If this happens, it will be a whopping 32% jump from last year’s number, propelling the sector forward to enter 2022 with a bang.
Millennials drive ESG investing
The investor pool is now made up of a large number of Millennials, who, as we already know, have a keen focus on creating a more sustainable world in which to live. Morgan Stanley Bank conducted a survey, which solidified this concept, as it found that nearly 90% of Millennials who were surveyed were more interested in investing in something that aligned with their values. The survey also showed that Millennials are more than twice as likely to invest in something that is committed to solving societal or economic problems. It stands to reason that ESG investing is then expanding at a faster rate as Millennials become a bigger portion of investors. Stock evaluations are now not only focused on a company’s financial value but also its social consciousness.
Criteria for ESG
The criteria for ESG span across a wide selection of projects and can be subjective, so we’ll outline a few examples of each to make things clearer. When it comes to environmental topics, this is perhaps the most straightforward segment of criteria. Environmental issues like waste management, deforestation, renewable energy sources, solutions for air and water pollution, raw material sourcing, biodiversity, and the company’s stance on climate change issues all fall under the ESG banner. Now, when it comes to the social criteria, the water gets a little murky as this can refer to a large number of potential issues, mostly around social relationships. Something that is very important to investors looking at this segment of ESG would be the company’s relationships with its employees. Here are some questions that investors could ask around the company-employee relationship.
- Are employees being paid fair salaries?
- What benefits do employees receive?
- Do the workplace policies include rules on diversity and inclusion?
- Are there opportunities for employees to learn and grow?
A company’s mission statement, customer relationships and CSI programs are also part of the social aspect of ESG. Next up we have governance, which essentially looks at how a company is managed. This includes whether a company’s stakeholders are attended to well, whether a company gives back to local communities, if there are transparent financial reports and accounting, and so on.
ESG may become essential
The rise of ESG can largely be attributed to three factors, the world’s shift towards sustainability, the next generation of investors influencing the nature of the investment, and more comprehensive data and analytics becoming easily available. ESG was once considered a less profitable, niche segment of investing but now it has taken the spotlight as the world collectively goes green. As such, ESG is becoming essential and its importance for companies is becoming crucial to both attracting new and maintaining existing investment. All in all, ESG assets are gaining popularity at the speed of light, and investors are looking at ESG as a long-term investment that may be more stable and offer a better return for them.
Here at Addendum, we offer an easy-to-use funding platform that connects corporate issuers and funders in the debt capital market. Transparency and efficiency are the names of the game at Addendum, so we offer standardised documentation and aim to simplify negotiations. In the context of ESG, issuer undertakings can be easily incorporated into our documentation process and many of our funders already have a strong interest in ESG assets. This leaves us well-positioned to help you issue and place your next ESG debt instrument. Find out more here about what we offer at Addendum and how corporates and funders can benefit from our seamless platform.