GREEN BONDS IN SOUTH AFRICA HOW GREEN BONDS CAN SUPPORT SOUTH AFRICA'S ENERGY TRANSITION - Climate Bonds Initiative
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GREEN BONDS IN
SOUTH AFRICA
HOW GREEN BONDS
CAN SUPPORT
SOUTH AFRICA’S
ENERGY TRANSITION
Prepared by the Climate Bonds Initiative Sponsored by Agora Energiewende
11. Introduction: The role of green bonds in financing the transition
A global economy in transition For South Africa, this is a risk. The carbon
By mid-2021, countries representing more than
intensity of South African exports is the Contents
highest in the world and, with the continuing
65% of global carbon dioxide emissions and more 1. The role of green bonds in financing
high proportion of electricity from coal, has
than 70% of the world economy, will have made the transition 2
not changed significantly over the past 10
ambitious commitments to carbon neutrality.
years.3 Proposed and existing international 2. South Africa context 5
The European Union, Japan and the Republic of carbon pricing, including carbon border tariff
3. The Global green bond market 7
Korea, together with more than 110 other countries, adjustments, is likely to expand, making South
have pledged carbon neutrality by 2050 while African exports vulnerable. One example, is the 4. How to issue a green bond 9
China aims to reach carbon neutrality by 20601. EU’s Carbon Border Adjustment Mechanism
5. Transition finance in South Africa 10
for selected sectors which is likely to be
The implications of this are enormous – investors
implemented in the next few years4 6. Green bond models for energy
all around the world are no longer questioning if
investment 15
a shift will happen but rather how quickly it will At the same time, South Africa has a huge
happen and how it will play out. Coal, in particular, opportunity - to be the first coal-based economy 7. Recommendations 17
is seen as a stranded asset with declining share in the global south to make a successful
Appendix: Types of bonds and labels 18
prices of coal companies in the US and all around transition to a low carbon economy, particularly
the destroying significant shareholder value over in the energy sector. With its aging fleet of coal-
the past year and leading some investors to rule fired power stations (almost all of which must be
out direct financing for coal. decommissioned over the next 20 years), South
Africa has no choice: it must build more energy
But the implications are much further reaching
generation capacity both to offset coal closures
than coal or even the fossil fuel sector – every
and to meet the growing demand for energy.
entity in every sector needs to be aligned with
Further, while it has yet to make a commitment,
zero carbon by 2050. The IEA’s Net Zero2 report
South Africa’s Low Emission Development
outlines a pathway to net zero which requires
Strategy outlines an aspiration to reduce
no new investment in fossil fuels (including gas)
greenhouse gas emissions to net zero by 2050.5,6
and where the least efficient coal plants are
phased out by 2030, the remaining coal plants Green bonds are part of the solution to the
still in use by 2040 are retrofitted. By 2050, financing challenge of this transition. They are
almost 90% of electricity generation comes from not by themselves a magic wand but global
renewable sources. experience to date has shown they are a vital tool
in harnessing the increasing investor appetite for
investments with green and social impacts.
‘Achieving net-zero emissions This report outlines the importance and
by 2050 will require nothing potential for green bonds in South Africa. It
short of the complete provides an overview of the global and South
transformation of the global African green bond markets and insights into the
energy system’. - IEA use of green and transition bonds to finance a
credible transition for South Africa.
In Europe, the implications of the EU Taxonomy
are already becoming clearer. In particular, bank
finance for projects like gas which was previously
touted as a transition fuel but increasingly
About the Climate Bonds Initiative
viewed as high-emissions due to methane The Climate Bonds Initiative (Climate Bonds) Climate Bonds conducts market analysis, policy
leakage, is hotly debated. It is not a stretch to is an international investor-focused not-for- research, and market development; advises
imagine how this will play out – green projects profit organisation working to mobilise the governments and regulators; and administers
will find it easier to attract capital and possibly USD100tn bond market for climate change a global green bond standard and certification
receive a pricing benefit while brown projects will solutions. It promotes investment in projects scheme. Climate Bonds screens green finance
find it hard to attract finance. and assets needed for a rapid transition instruments against its Climate Bonds Taxonomy
to a low carbon, climate resilient, and fair to determine alignment and uses sector
Some commentators are describing the
economy. The mission focus is to help drive specific criteria for certification. Climate Bonds
favourable conditions for green finance and
down the cost of capital for large-scale Certification is a labelling scheme. Rigorous
products as a green window where green
climate and infrastructure projects and to scientific criteria ensure that it is consistent
products receive preferential treatment – in
support governments seeking increased with the 2˚C global warming limit of the Paris
financing, export rules etc.
capital markets investment to meet climate Agreement. Certification requires initial and
and greenhouse gas (GHG) emission ongoing third-party verification to ensure the
reduction goals. assets meet the metrics of Sector Criteria.
Green Bonds in South Africa Climate Bonds Initiative 2Green bonds are part of the The core benefits of the green label both to by a regulator when the People’s Bank of China
unstoppable momentum for the issuer and the investor have underpinned published the Green Bond Endorsed Project
sustainable investment the market’s success and are summarised in the Catalogue. Multiple regions and countries
box below. followed by adopting guidance largely in line
The concept behind the green bond market
with the GBP (ASEAN, Japan, India etc.).
is a simple one – that the proceeds raised While the green bond concept is simple, a web
are directed to green projects, assets, or of supporting guidelines, regulations and In 2020, the EU Taxonomy Regulation entered
expenditures. This simplicity has been key to its principles have emerged to ensure that the into force which has prompted other countries,
success. For the most part, green bonds do not market avoids greenwash which, in turn, relies including South Africa to develop their own. The
have complex repayment structures linked to on strong guidance to answer the more complex development of taxonomies is an important
performance metrics. question underpinning the entire market ‘What step in providing clear guidance around what
is green?’. is green and ensuring that this changes over
The market is part of a broader shift to finance
time in line with the requirements of the Paris
an economy-wide transition to a low carbon To answer this question, guidance has evolved
Agreement. If the development of taxonomies
economy in line with the goals of the Paris from market-led voluntary initiatives to an
is also harmonised across the world, they can
Agreement. This will require huge allocations of increasingly regulated environment. Initial
also facilitate the flow of international capital
capital to shift away from stranded high carbon deals utilised science-based guidance such as
to green projects in emerging and developed
assets towards those aligned with zero carbon the Climate Bonds Standard (first released in
markets (EM and DM).7
by 2050. The green bond market has provided 2012), second party opinions or the voluntary
a critical link between assets and financial but widely adopted Green Bond Principles (GBP)
instruments with a ‘use of proceeds’ (UoP) model which were first released in 2013. But increasingly
whereby finance raised is directly linked to green regulators have stepped in – this began in 2015 in
assets/projects on the ground. China with the publication of the first ‘taxonomy’
Benefits of green bonds
Issuers: Investors:
1. Access to a larger pool 4. Stock Price Bounce 1. Green bonds retain
of investors The results of academic research their value in the
Green bonds attract a broader suggests that stock prices react secondary market
range of investors including positively to green bond issuance. Our Green Bond Pricing in
a multiplying list of funds One in particular demonstrates the Primary Market series
mandated to invest in green and/or social that the number and significance of this has consistently demonstrated that green
products. The most recent Climate Bonds’ reaction increased after the Paris Agreement. bonds tighten more than vanilla (non-green)
research9 determined that 56% of green A determinant of this reaction is that investors equivalents in the secondary market after both
bonds were allocated to ‘green’ investors. The expected climate-related regulations following 7 and 28 days. In other words, even after they
Climate Bonds Treasurer survey found that such an agreement and, therefore, placed greater are issued, they hold their value to investors.
98% of deals attracted new investors10 value on the “green” flag of the bond issuance.12
2. Green bonds have
2. Diversification of 5. Market Signal demonstrated lower
investor base The activity of preparing to issue volatility
As well as new investors, green a green bond involves an audit There is mounting evidence
bonds tend to attract a wider process to determine the climate to suggest that green bonds
range of investors from pension risks of an entity. This exercise demonstrate lower volatility in the secondary
funds to asset managers with green mandates helps entities to develop transition plans and market compared to vanilla equivalents. The
as well as central banks. incorporate them into business plans and German ‘twin’ sovereign provided a dream case
strategic initiatives. A green bond is therefore study for this and is discussed in our H2 2020
3. Green bonds can attract a
sending a signal to investors that the entity is Pricing paper. Additional research on the topic
lower cost of capital
preparing to protect revenues from climate has been done by market participants.13
Climate Bonds’ research11
change risks.
of USD and EUR shows that, 2. Emerging evidence of
broadly speaking, green bonds greater liquidity
tended to attract larger book cover and In March 2020, the COVID-19
spread compression during the book-building pandemic brought financial
process, which can allow issuers to squeeze the markets to a standstill.
pricing, potentially to the point of achieving a Investors reported being able to transact green
‘greenium’ (a greenium occurs when the green bonds while the market was closed to other
bond prices inside the yield curve and results in types of instruments. This is important because
cheaper cost of capital for the issuer). While it suggests that green bonds offer investors
the analysis is based on the most liquid part greater flexibility.
of the market, there are multiple anecdotal
examples of local currency bonds achieving
tighter pricing than expected.
Green Bonds in South Africa Climate Bonds Initiative 3The role of NDCs in defining country to meet the goals of the Paris Agreement and yet likely to be in line with the Paris Agreement
transition pathways detailed enough on carbon budgets, an NDC 1.5˚C temperature goal). The NDC Update will
would allow a more nuanced and country- need much greater ambition, particularly in
While the 2050 net-zero is a global target,
specific approach to analysing transition the power sector, to be aligned with the Paris
not every country’s decarbonisation
pathways. Agreement.
trajectory to achieve this will look the
same – sectors in some countries may face This, however, is not the case – the majority of South Africa intends to commit to a net zero
steeper short-term emission reductions NDCs are neither sufficient nor detailed enough to CO2 target by 2050 as part of a visionary
pathways than other countries depending deliver the Paris goals - including South Africa’s. statement in its Low-Emissions Development
on local circumstances, technological Strategy 2050 submitted to the UNFCCC.
South Africa published a draft of its updated
developments, jobs etc.
NDC in March 2021.14 It proposes to strengthen In the absence of granular and ambitious
A Nationally Determined Contribution (NDC) the target range for 2030 where the upper end NDCs globally, to understand South Africa’s
as submitted to the UNFCCC should be the is now 28% lower than in the previous NDC and transition, we rely on more blunt tools
main tool for understanding the appropriate the lower end is unchanged. Under the Climate and assessment of sector decarbonisation
transition pathway for a country. And, if Action Tracker, the proposed change, although pathways, focusing on sectors with the highest
individual and collective NDCs were sufficient strengthened is regarded as ‘insufficient’15 (i.e. not emissions first – such as energy.
Why green bonds for 1. Green bonds offer a competitive advantage important in EM where other credit concerns are
South Africa? at a time of instability – with the South at play – green credentials should be the highest
Africa economy seen by global credit rating demonstration of best practice. This doesn’t
South Africa has a unique position among EM,
agencies and some international investors as mean that local criteria can’t account for different
particularly in Africa, in that it has a developed
unstable, green bonds represent a possible starting points – buildings criteria, for example,
and large capital market with frequent bond
competitive advantage to access a large pool can account for vastly different average energy
issuers (unlike many EM) but also faces many
of international investors focused on green. efficiency levels in buildings across the world and
of the same challenges as other EM countries –
still be aligned with the same goal. However, the
particularly in its capacity to take on debt. 2. Green bonds can demonstrate evidence of
development of different local rules, while useful,
credible transitions to international investors
The incredibly low cost of debt capital seen will risk losing international investor confidence
who are decarbonising their portfolios in line
across the developed world has led many and demand if they are not credible.
with the goals of the Paris Agreement.
commentators, including Climate Bonds, to note
that now is the perfect moment in history to 3. Asset-backed green bonds can reduce debt
finance a green economy. burdens and attract international capital
by securing them against assets with low
Such conditions, however, do not exist across
stranded asset risk such as renewable energy
much of the developing world, including in South
and separating them from balance sheets of
Africa. The yield curve comparison with the US
entities that are exposed to high stranded asset
demonstrates this with the yield for 5-year bonds
risk and unable to access international capital.
for the South African sovereign at 6.8% compared
to 0.361% for the USA8. All bonds must meet international climate
criteria – to attract international investor capital,
But even despite this, and in some instances
bonds must be in line with international criteria
because of this, green bonds remain an
defining zero carbon by 2050. This is particularly
important tool for the South African market.
Climate Bonds Treasurer Survey
Green Bond Treasurer Survey explored the • 88% of respondents said they planned to
core benefits and challenges of issuing green issue more green bonds
bonds to provide guidance to potential
• 84% of the green bonds in the sample, are
newcomers into green financial markets.
listed on at least one stock exchange
Eighty-six treasurers from thirty-four countries
• 70% of respondents said the demand for
were interviewed represented around 44% of
their green bond was higher
the identified green bond universe at the time
of data collection. Key Findings: • 48% responded that the cost of funding
green bonds was similar to that of vanilla
• 98% of respondents said that their green
equivalents
bond attracted new investors
• 91% of respondents said a green bond
facilitated more engagement with investors
Green Bonds in South Africa Climate Bonds Initiative 42. South Africa context
Just two entities account for over 50% of South Eskom’s 50-year decommissioning outline for coal power
Africa’s emissions: Eskom and Sasol. Eskom, as
the sole owner and operator of all coal energy Majuba
generation in South Africa makes up 42% while
Sasol, with its coal to liquids business accounts Kendal
for 11%.
Matimba
Compared to its G20 peers, South Africa has
Lethabo
the largest share of electricity generated by coal
power (89%) - substantially higher than the next Tutuka
closest countries India (74%) and China (68%).16
It follows that to address climate-related risks Duvha
in the country it will be essential to reduce
Matla
electricity-related emissions17.
The state of the current energy system in South Kriel
Africa has been well articulated elsewhere. Arnot
However, for those unfamiliar with the market, it
is worth noting a few critical points. Hendrina
Power plants
Eskom: A large state public utility monopoly, Camden
Eskom, supplies about 95% of South Africa’s
electricity. Coal makes up 89% of electricity Komati
generation – from power plants, of which, at
Grootvlei
least 2 need to shut down urgently with another
eleven power stations due to be shut down over 2020 2025 2030 2035 2040 2045 2050
the next 30 years. Source: Eskom and IRP30
Eskom is straddled with debt - R484bn
in Eskom’s Just Energy Transition Vision23 which witnessed rapid cost declines in the actual
(USD32bn) to be precise. This is due to much
emphasises both the ‘just’ and the ‘transition’ price of wind and solar in each of the REIPPP
debated corruption and mismanagement, huge
which includes a 50-year plan to decommission bid windows.
cost blowouts and major delays with its two
its coal plants. While there are some questions as
coal megaprojects (Medupi and Kusile), an aging Despite its success, the REIPPP stalled from 2016-
to how Eskom will achieve this vision, it is clear
power network and an inability to recoup costs 2020 in part due to a lack of political determination
that capacity needs to expand and new coal is
from consumers. and in part due to Eskom’s refusal to sign PPAs. The
very unlikely to be part of this expansion both on
REIPPP is expected to be restarted in 2021 with Bid
Eskom is a frequent bond issuer, its Domestic environmental24 and cost grounds.
round 5. Separate to the REIPPP, the RMIPPPP
Multi Term Note (DMTN) programme is
Renewable energy cost has plummeted (Risk Mitigation IPPPP) was launched in 2020 to
guaranteed by the Government of South Africa.
along with global trends as demonstrated procure emergency power (not only renewables)
It also issues USD bonds periodically, a total of
through the Renewable Energy Independent given the power shortages. The RMIPPPP is
USD2.25bn issued in international markets since
Power Producer Programme (REIPPP), a currently the source of much debate and one of the
2013. Fitch Ratings has Eskom Long-Term Local-
public procurement programme that was preferred bidders, Karpowership, (which planned
Currency Issuer Default Rating at ‘B+’, the senior
introduced to scale up renewable energy to generate up to 1,220MW by parking eight ships
unsecured debt at ‘B+’/’RR4’ and the senior
provision. From 2011 to 2015, five rounds of for two decades in ports across South Africa) had
unsecured guaranteed debt at ‘BB’.18
reverse auctions were held for construction been, at the time of writing, refused environmental
National Treasury is now considering moving and supply of 3,625MW of large-scale (>5MW) approvals relating to its bid. If approved, it would
a part of the debt into an SPV. Under the renewable energy capacity. The REIPPP lock in gas for 20 years at a high price.
arrangement, new and retained debt would be
paid off as a first priority while that in the SPV REIPPP saw large cost reductions across all technologies
would have at least 10 years to be repaid and
200
would be guaranteed by the sovereign19. Eskom
is not currently considering defaulting on its blended weighted
outstanding debt. 150 average tariff
An aging fleet - breakdowns have put up to
12.1GW of installed capacity out of commission
100
(out of a total generation capacity of 44GW),
according to Eskom, forcing it into daily load
shedding20 (blackouts). Aging power stations 50
ZARc/kWh
mean that diesel generation backup is used
costing astronomical amounts.
0
Transition plan – Eskom aims to be zero
Bid Bid Bid Bid Bid
carbon by 205021,22 with a simultaneous window 1 window 2 window 3 window 4A window 4B
increase in sustainable jobs. This is articulated Source:50
Green Bonds in South Africa Climate Bonds Initiative 5Coal-fired power station costs compared to new-build solar PV and wind in 2030
Fuel Cost Capital cost
Variable operations and Minimum emissions
120
maintenance cost standard
Start & shutdown cost New build solar
100
Fixed operating cost New build wind
80
60
40
Cost (c/kWh)
20
0
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Source: Meridian Economics33
There is also a growing evidence that when A Just transition is a key consideration of any The transition away from coal will have
it comes to new power capacity additions, pathway forward for the energy sector transition implications for jobs which are not easily
renewables are cheaper. A study by Meridian and will require a substantial rethink about the accounted for in this framework. However, we
Economics notes that, the plunging cost of types of jobs available and where they are located note that 2040 is still 19 years away allowing
renewables has made new build RE the lower as well as the re-purposing of existing coal power almost 2 decades for a measured transition away
cost technology for future energy. Further, coal, stations. This has particular implications for from coal jobs.
nuclear and hydro are no longer economically Mpumalanga province where most of the coal jobs
competitive new-build generation technologies are located but has relatively poor diversification
in the SA power sector.25,26 opportunities at present.
Complicated politics – there are some positive
underpinnings including the Integrated
Resource Plan 201927 which sets binding targets South Africa’s Green Finance Taxonomy
to cut installed coal capacity from 39.1GW in
2018 to 33.8GW in 2030 while increasing solar In 2020, under the leadership of National as recommended by National Treasury’s
PV fivefold to 8GW, raise wind sixfold to 11.4GW. Treasury, the National Business Initiative (NBI) Financing a Sustainable Economy Technical
But the nitty gritty is complicated. The IRP is and Carbon Trust began working to develop Paper (2020).
widely criticised by experts as being neither a first national Green Finance Taxonomy for
The taxonomy was released for public
compatible with a net zero by 2050 trajectory nor South Africa. It was kicked off by the launch of
consultation in June 202132. It is based on the
representing a least cost pathway.28 It also makes a Project briefing report31 as well as a public
EU Taxonomy with similar thresholds in place
allocations for new coal, and there is a lack of consultation phase of six workshops covering
to define substantial contribution and includes
clarity under “other” which would likely include key stakeholders. The purpose of the Working
do no significant harm provisions. An updated
more gas. Group is to develop a taxonomy for green,
taxonomy is expected in Q4 2021.
social and sustainable finance initiatives for
The job implications are also complicated- coal
the South Africa financial services industry,
mining employs over 90,000 people29. This means
that size limits have been imposed on new-build
solar PV of 1 GW and wind of 1.6 GW specifically
to constrain the growth of the sector. Further,
Mineral resources and Energy Minister Gwede
Mantashe is nicknamed King Coal given his pro-
coal sentiment. In short, the politics of energy
and of coal are complex.
Green Bonds in South Africa Climate Bonds Initiative 63. The Global green bond market
The global green bond market has grown from just The green bond market is growing, attracting a broader range of issuers
a handful of deals in 2013, to an over USD250bn
per year market. In 2020, cumulative issuance 300
passed the USD1tn milestone with the number
and diversity of issuers continuing to grow. 250
In 2020, issuance reached USD297bn - a 200
record-breaking year despite the headwinds
faced by the COVID pandemic. 150
Broadly speaking, 2020 was characterised by
growth in public sector issuer types while 100
private sector volumes either remained static USD Billions
or shrunk. Public sector issuers are typically 50
less vulnerable to market dynamics because
they tend to have long-term investment plans 0
in place. Government support packages took 2014 2015 2016 2017 2018 2019 2020 2021*
effect in Q2 and many public sector issuers turned
their attention to social- and/or sustainability- ABS Development Bank Financial corporate Government-backed entity
themed bonds (see next page) to contribute to the
immediate relief of the economic shock driven by Loan Local Government Sovereign Non-financial corporate
the pandemic and its ramifications. By September,
confidence had returned and entities that had
postponed green bonds earlier in the year were
Green bond market: Europe leads growth
prepared, resulting in the most prolific third 300
quarter recorded for green issuance.
Africa LAC
A total of 80% of 2020 green volume originated 250
from developed markets (DM) in 2020 with
Asia-Pacific N America
Europe leading. European issuance was led by 200
government-backed entities and non-financial
corporates, each contributing 25%. Government Europe Supranational
150
and policy support is creating more opportunities
for private sector investment in Europe and a more
100
diverse range of issuers are coming to the market
USD Billions
beyond utilities, real estate companies, and banks.
For example, in the under-supplied automotive 50
sector, Daimler AG, Volvo, and Volkswagen all
issued debut green bonds in 2020. 0
Cumulatively, 20% of issuance has originated 2014 2015 2016 2017 2018 2019 2020 2021*
from EM countries. This has been driven by * Data goes up to end June 2021
huge issuance volumes out of China but also
includes India, Chile, Brazil and Indonesia.
EM market growth is not well reflected in the
Emerging market issuers are primarily issuing in foreign currencies
numbers because deal sizes are small but there 100%
has been USD211.4bn of cumulative issuance
from issuers in 46 countries classified as EM 90% 15% 47% 77% 16%
including South Africa, Ghana, Namibia, Nigeria, 80%
and Kenya.
70%
EM issuers are primarily issuing in foreign
60%
currencies to access international capital.
This includes large deals such as the Republic 50%
of Chile (EUR and USD), Bank of China (USD,
40%
EUR) and others. South Africa, however, bucks
the trend with the majority of issuance in ZAR. 30%
The ability to issue in local currency is a key
20%
Percentage
challenge for EM issuers who are not able to
take on currency risk and for investors who are 10% 85% 53% 23% 84%
not always able to access hedging instruments 0
either because they are not available or are
very expensive. DM EM EM Ex China South Africa
Issuance in local currency Issuance in foreign currency
Green Bonds in South Africa Climate Bonds Initiative 7Renewable energy accounts for the largest Use of proceeds have diversified over time with Energy
portion of spending. Its share has decreased and Buildings categories leading
over time as the market has matured from 100%
low hanging fruit like renewable energy to
more complex areas like water and waste but 80%
volumes have continued to increase year-on-
year. We expect renewable to remain important, 60%
particularly given that entire energy systems
40%
transform away from fossil fuels within the next
few decades. 20%
The success of the green bond market has
0
supported the increase in debt issued
under other themes – sustainable and social, 2013 2014 2015 2016 2017 2018 2019 2020 2021 Total
in particular, all with a focus on societal goals Energy Transport Buildings Water Waste Land Use
articulated in the Sustainable Development
Industry ICT Unallocated A&R
Goals. The social theme experienced massive
growth in 2020 as issuers turned to the debt
market to support the impacts of COVID-19 and Global green, social and sustainability bond issuance doubled in 2020
its ramifications. 700
More is needed – while the success of the global 600 Green
green bond market has been remarkable, far greater 500 Social
ambition is required. One cumulative trillion is a
400 Sustainability
start but a trillion annually is what is needed
(at least) to meet the goals of the Paris Agreement. 300
USD billions
200
100
0
2015 2016 2017 2018 2019 2020
South African green South African green bond market
bond market 1.2 3
Green bond issuance in South Africa has been Number of Instruments
1.0
patchy with strong issuance early on followed
by small volumes in the intervening years and a 0.8 2
Number of instruments
bumper year in 2019.
0.6
Encouragingly, there has been a good
diversification of issuers including banks and
0.4 1
USD billions
cities. The City of Cape Town water bond in
particular attracted a great deal of attention as 0.2
part of the solution to the City’s water crisis in
2018 which saw global media attention. 0 0
2012 2014 2017 2018 2019 2020 2021*
Nedbank has been the most frequent issuer with
*Some 2021 deals are pending inclusion in the Climate Bonds green bonds database due to a lack of information available
3 bonds to date while Redstone Solar Plant was but are included here and below for completeness.
the first green loan and the largest deal to date.
The 100MW Redstone Solar plant is a CSP South Africa green bond market has seen 10 different issuers
plant and was part of the REIPPP.
ABSA 5% City of Cape Town 3%
In July 2019 ACWA received Certification for the
refinancing of its development of the Redstone Standard Bank of City of Johannesburg 4%
Solar Thermal Power Plant. The project was South Africa 7%
Redstone Solar Development Bank of
developed by ACWA Power, with SolarReserve
Thermal Southern Africa 8%
providing the CSP technology. SolarReserve is
Power Plant
headquartered California and is an expert CSP First Rand Bank 7%
19%
developer. The solar farm is a Concentrated
Solar Power plant located in Postmasburg, in
Growthpoint
the Northern Cape. The plant has an installed
Industrial Properties 3%
capacity of 100MW and it is one of the largest Nedbank
renewable electricity generation plants in South Development
22%
Africa. The development cost of the project is Corporation
over USD1bn. It became operational in late 2018. 22%
Green Bonds in South Africa Climate Bonds Initiative 84. How to issue a green bond
Process comparison between regular bonds and bonds labelled green issuances
A. Issuing a regular bond B. Issuing a green bond – Additional steps
Pre-Issuance Pre-Issuance
• Get rated • Define a Green Bond Framework:
• Get market intelligence on currency, tenor, size 1. Preparation
2. Define how project meets green bond eligibility criteria (Use of Proceeds)
• Decide on underwriters
3. Put in place project selection process and select eligible projects
• Register with local regulator (Selection of Projects and Assets)
4. Set up accounts and process to earmark and allocate proceeds – ring-
• Issue prospectus
fence the proceeds (Management of Proceeds)
• Comfort letter / due diligence 5. Establish Reporting processes
6. Get pre-issuance external review (External Review)
• Outreach through road shows and sales
• Check for support mechanisms
Issuance: Launch the bond into the market Issuance: Launch the bond into the market
• Build the book of investors who are interested in the bond • Include the green attributes in marketing materials and investor documents
Post-Issuance Post-Issuance
• Price and allocate bond to support secondary market • Allocate proceeds to the projects
performance
• Monitor the projects and track allocation over time
• Communication to the capital market
• Publish impact Report
• Monitor secondary market
• Post issuance Audit if necessary
Guide to Climate Bonds Certification
1 Issuer begins by preparing the bond 2 Engage a verifier
• Identify assets that meet the relevant sector • Engage an Approved Verifier for Pre- and Post-
criteria and compile supporting Issuance Certification
information
• Provide them with relevant
• Create Green Bond
Framework setting out how 3 information
proceeds of the bond
Get Certified & issue a • Receive a Verifier’s
will be used the Issuer’s Report giving assurance
internal controls Certified Climate Bond that Climate Bonds
Standards requirements
• Submit the Verifier’s Report and are met
Information Form to the Climate
Bonds Initiative
4 Confirm the
Certification
• Receive a decision on Pre-Issuance
Certification 5 Report annually
Post-Issuance • Issue the bond, using the Certified • Prepare a simple
Climate Bond mark report each year for term of
the bond
• Within 24 months of
issuance, submit the
Verifiers Post-Issuance report • Provide it to bond holders and
Climate Bonds Initiative
• Receive notification of Post-Issuance • Provide updates through public disclosure
Certification
Green Bonds in South Africa Climate Bonds Initiative 94. Transition finance in South Africa
Achieving the goals of the Paris Agreement For South Africa, given its dependence on coal
Understanding country-specific
will require entities with some of the highest and that the energy sector accounts for 45% of
transition pathways
emissions levels to re-imagine themselves, all emissions, the transition discussion is largely
planning and implementing transition pathways focused on energy and particularly on electricity. The Paris Agreement targets are collective,
in a world that has renewed climate priorities. But energy is just the beginning. South Africa has global targets. How these are allocated to
a huge role to play, for example, in the global countries, industries or sectors is a complex
Green and sustainable bonds have become an
debate on how mining is part of the transition. question with no fixed answer.
important tool to finance these transitions. Large
GHG emitters, however, are still largely absent In September 2020, the Climate Bonds Initiative For some industries, the Paris-aligned
from the green bond market despite their vital published a proposal to market entitled transition pathway faces significant barriers
role in reducing global emissions and their presence Financing Credible Transitions.34 It outlines such as relative ease or difficulty of meeting
in mainstream investment portfolios. Their a Framework for evaluating what a credible GHG thresholds in different locations, the
reluctance is perhaps partly due to accusations transition looks like for whole entities as well as degree of economic development or the need
of greenwashing. Transition finance has emerged the individual activities that they operate. to maintain resource security. For this reason,
to fill this gap and encompass a broader range there may be some flexibility (particularly in
In simple terms, it first outlines how activities
of high-emitting sectors such as fossil fuels, the short term) for how each country defines
and entities can play a role in the 2050 low-
electricity generation, industry, aviation etc. its pathway while still having an end goal that
carbon economy and whether an activity can
is science-based.
The transition concept is applicable, not just be decarbonised over time (Pathway to Zero) or
to individual assets, but to whole entities should be replaced with a low-carbon alternative For many countries, including South Africa,
or economies following credible strategies that (Interim and Stranded). It then outlines five NDCs are neither detailed nor ambitious
are aligned with the Paris Agreement. A credible transition principles for an activity/entity to meet enough to provide a thorough understanding
transition strategy is not about where the entity is to be seen as credible (see below). of its transition pathway. Despite this lack of
today but how its strategy and operating metrics clarity, a great deal of research for South Africa37,38
South Africa is in a somewhat unique situation
show where it will be in 2030 and in 2050 (net indicates that the biggest opportunity for
in that over 50% of its GHG emissions come
zero emissions). short term decarbonisation is within the power
from just two entities: Eskom (42%) and
sector. This is because it makes up a huge
While having a credible transition strategy will Sasol (11%).35 Given this, a huge focus on any
portion of GHG emissions (42%) and low/
enable entities and economies access to a huge transition from a country perspective needs to
zero carbon technology is already available at
pool of capital across asset classes (bonds, be focused on these two entities. The spotlight
low cost to replace generation capacity. We
loans, equities etc.), investors have also raised below highlights some transition opportunities
have therefore assumed that electricity will
concerns around the potential for greenwash for Eskom and Sasol. However, it is noted that
need to do the ‘heavy lifting’ in the short to
- in particular that ‘transition’ is just ‘business as these are illustrative examples to show some of
medium term as costs come down for other
usual’ by another name i.e. that the label is being the on the ground implications of the transition
sectors (aviation, hydrogen etc.).
used as a catch all for activities that are a ‘bit framework for activities but that they cannot
green’ but have very limited impact in moving the fully take into account the country context and
needle on reducing global emissions. This need associated complexities. These are discussed
not be the case. The transition concept and any in the box.
associated label could and should be a useful
tool for identifying sectors and entities that are
making ambitious transitions, as a complement
to the existing green label.
A starting point – 5 Transition Principles to protect from greenwash
1. In line with 1.5 degree trajectory 4. Technological viability trumps
All goals and pathways need to economic competitiveness
align with zero carbon by 2050 and Pathways must include an assessment
nearly halving emissions by 2030. of current and expected technologies.
Where a viable technology exists, even if
relatively expensive, it should be used to
2. Established by science
All goals and pathways must be determine the decarbonisation pathway
for that economic activity.
led by scientific experts and be
harmonised across countries.
3. Offsets don’t count 5. Action not pledges
A credible transition is backed by operating
Credible transition goals and
metrics rather than a commitment/pledge
pathways don’t count offsets,
to follow a transition pathway at some
but should count upstream scope point in the future. In other words, this is
3 emissions.
NOT a transition to a transition.
Green Bonds in South Africa Climate Bonds Initiative 10Spotlight on Eskom Entity-level finance keep the lights on by continuing to operate coal
in the medium-term power and to be able to
Extensive research has been carried out by others To access transition finance at an entity level
have access to affordable financing to maintain
on the transition pathway for Eskom which is requires an entity to be following a transition
and operate its existing asset base while
important context for understanding Eskom pathway to net-zero by 2050 as demonstrated
building up a new asset based.
within the Transition framework outline. This can by a credible strategy and measurable operating
be briefly summarised as follows: metrics. This involves both the decarbonisation However, individual coal projects will not qualify
activities as well as switching away from activities for transition finance at the asset level whether
• The decarbonisation of the power sector
that cannot be decarbonised. new or existing.
is systemically important in South Africa’s
decarbonisation pathway and in is an enabler For Eskom, ultimately, this will require transition To evaluate whether or not a transition strategy
for the decarbonisation of other sectors – in away from coal toward renewable energy and, is credible, it needs to meet the five Transition
particular for sectors such as transport, as above, ensuring all coal is offline by 2040. It principles above. Based on the information
building and industry. will also require Eskom to have a credible and available about Eskom’s transition plan, this
ambitious transition plan in place which includes could attract transition finance at the entity level.
• The electricity sector is where the largest
clear milestones to be met to 2050.
amount of emissions can be mitigated at The figure below gives some indication of how
the least cost. This is both because of the high If a credible transition plan is in place that is Eskom as a whole meets the Five Transition
existing emissions from coal as well and well aligned with the Paris Agreement, Eskom will Principles based on publicly available
as the availability and rapidly declining cost of be eligible for transition at the entity level information.
renewable energy. irrespective of the fact that it continues to
operate coal. This is a core underpinning of the
This means that for South Africa to meet Paris
transition concept - that it is about the direction
Agreement, all coal will likely have to be
of travel rather than the current state of play.
offline by 2040.36 We have used this 2040 as a
This is important given the need Eskom has to
basis for the assessment below.
Eskom: Entity-level progress on the Five Transition Principles
Principle What is in place already What more is needed
1. In line with The Just Energy Transition states a Vision to be Net Progress made but more is needed:
1.5-degree trajectory Zero by 2050.
• A 2050 Net Zero commitment at corporate level
2. Established by This is not yet a target.
• Operating metrics, milestones and KPIs to accompany target
science
Eskom has a plan in place to retire almost all of its
• Shorten time frame on coal retirement to all coal offline by 2040
15 coal plants by 2050. This includes:
• Increasing RE capacity (Individual assets/activities
Eskom: illustrative breakdown of activities (not exhaustive)
For individual assets, there are ‘easy green’ areas that
Category Sub-category Transition Green/transition finance
Eskom could easily qualify for green financing in the
category available
short term. These include financing and refinancing
of renewable energy, pumped storage etc. Power Coal power Stranded* Only for early decommissioning
generation and repurposing of coal-fired power
The more challenging activities are those in
stations
the ‘Stranded’ category – here, the only eligible
expenditures are measures that significantly Renewable power Near Zero Yes, for all near zero activities
reduce emissions in the short term. For coal, given
Nuclear power Unclear Nuclear pathway is currently unclear
the limited ability to significantly reduce emissions
in the short term, the main areas which qualify Gas power Interim/ Stranded Only measures that capture and
would be early plant closure and repurposing. utilise gas leakage in gas pipelines
OR
Repurposing of old power plants is a key part of
Measures to retrofit pipelines/ power
Eskom’s Just Energy Transition strategy to maintain
stations for hydrogen
jobs in the areas they employ people already. Early
closure and repurposing projects could attract Hydro power Pathway to Zero Yes, full asset but with some caveats
green and sustainable finance investors.
Pumped storage Enabling Yes, for full asset
In the framework below, both new and existing
Transmission Transmission Enabling Only if connecting renewable energy
coal are deemed as stranded at the activity level.
network OR
This means that any finance raised specifically to
Investments enabling grid
finance new or refinance existing coal (i.e. use of
decarbonisation
proceeds green bonds) would not meet investor
expectations of green/transition finance. Substations Enabling As above
The role of gas in the transition
Gas has long been positioned as a transition emissions in their sample came from just 2% of Not eligible:
fuel with the potential to significantly reduce sites.40 In other words, while improvements can
New gas-fired power projects
emissions if replacing coal. Emerging evidence be made across the system – a few accidents in a
is, however, indicating that the steep trajectory tiny minority of sites, can cause average leakage Minor efficiency upgrades to existing gas
required to reduce emissions leaves very rates to go over 3%. While better protocols can infrastructure
limited room for gas in the transition. This reduce accidents, they are still a big risk and
Potentially eligible*:
is reflected in the IEA’s Net Zero Emissions difficult to mitigate across the extensive gas
scenario that demonstrates that to deliver the system. The retrofitting of existing gas pipelines
Paris goals, no new investments in fossil fuels to be ‘hydrogen ready’ is eligible as an
Lastly, and importantly for countries like South
can be allowed. enabling activity
Africa, there is a lock in problem. While there
The primary reason for this is methane maybe arguments to be made to improve Significant efficiency improvements to existing
leakage makes GHG) emissions from gas-fired efficiency of existing gas plants in the interim, new gas power may be eligible if seen as not
power much closer to coal than previously gas infrastructure will last for decades – far beyond locking in infrastructure beyond sunset date
realised. Calculations for GHG emissions the point at which even best-case-scenario
Projects to reduce methane losses e.g.
savings from using natural gas instead of emissions from gas power will be higher than what
Substantial reduction in gas flaring
coal have not included the gas supply chain. is required to meet the Paris Agreement.
However, if gas leaks more than just 3% of its Gas power for heavy industry could be
There remains a great deal debate around gas and
content along the route from wellhead to power an interim activity until green hydrogen
its role in the transition -in particular for existing
station, it is worse for the climate than coal.39 is available
assets which will continue to operate while
While better leak management and protocols renewable energy infrastructure is expanded to Blue hydrogen (using gas) may be an interim
in place for measurement may help, there first replace coal infrastructure. activity (i.e. eligible in the short term) if it
is another problem – the super-emitters boosts volume demand for hydrogen.
Given the emerging evidence regarding gas,
problem. A study of US gas production by
Climate Bonds’ asserts that the role for gas in the
the NRDC showed that over 44% of methane *Note that Climate Bonds does not currently have criteria relating
transition can be briefly summarised as follows: to gas as an interim fuel
Green Bonds in South Africa Climate Bonds Initiative 12Spotlight on Sasol The current targets are some way off the global On the other hand, while its 2030 commitments
Paris Agreement target to nearly halve emissions are not yet sufficient and its 2050 ambition is not
Sasol is the 2nd largest emitter in South Africa.
by 2030 and if, seen alone, is insufficient to be yet available, actions are being taken in support
It produces a wide range of liquid fuel and
eligible for entity-level transition finance. of a strategic shift in Sasol’s business model
chemical products using a process known
which are encouraging albeit at a nascent stage.
as ‘Fischer-Tropsch’. This is different to a As discussed, not every entity or sector
These include:
conventional crude oil refinery and, in simple within South Africa will have the same
terms, uses a carbon feedstock (coal) to produce decarbonisation trajectory so there could • The procurement of renewable energy.
hydrogen as well as a range of synthetic fuels be a case for Sasol to have a more gradual Sasol is building its renewable energy (RE)
including diesel, kerosene and jet fuel. pathway than other sectors/entities. In the facilities to reduce its dependency on coal-
absence of this granular information, the based power which is a major part of its
Entity
1.5-degree trajectory is for all sectors to r GHG footprint.
At the entity level, currently Sasol’s current transition oughly halve emissions by 2030 and be net
• Green hydrogen. Actions are already
plan is to reduce emissions by at least 10% by 2030. zero by 2050. Given its 2030 target, Sasol
being taken to increase hydrogen ramp up
Sasol is due to announce its 2050 targets (as well will need a more stringent 2030 and 2050
through concept and pilot projects.
as a review of its 2030 target) in September 2021. commitment to attract entity-level
These targets are likely to be more ambitious. transition finance.
Sasol: Entity-level progress on the Five Transition Principles
Principle What is already happening in support of a What more is needed
credible transition
1. In line with >10% GHG reduction by 2030 for energy business. Progress made, much more needed
1.5-degree trajectory
The long-term vision in to shift to Hydrogen as a • Net zero by 2050 target needed.
2. Established by core part of the business.
• Shift focus away from gas in the medium term
science
• Ramp up hydrogen vision
3. Offsets don’t count Offsets are part of Sasol’s transition plan as allowed Offsets can continue to be used as a complementary measure
under the South Africa carbon tax act (Max of 5-10%) but should not be a tool to achieve short to medium term GHG
although this is in addition to GHG emissions targets emission reduction targets.
(rather than as a way to achieve targets).
4. Technological At present, a major opportunity for Sasol is in Progress made, more needed
viability trumps green hydrogen – both as a product they can
There is huge potential for ramping up green hydrogen production
economic sell to consumers and as an input into their
both for its customers and for use in its own processes. The
competitiveness processes. Sasol is already one of the largest
Fischer-Tropsch assets can play a role in this process.
producers of Hydrogen (not green) in the world
and has prototype projects and plans to produce The next step for Sasol is to
green hydrogen.
a. Continue green hydrogen proof on concept
Sasol is also supporting demonstration projects
b. Outline pathway and enabling conditions required to ramp up
that show-case the potential of hydrogen, such
green hydrogen production
as the Department of Science and Innovation’s
hydrogen fuel cell project. c. Consider how it changes its product suite over time to reduce
scope 3 emissions.
5. Action not pledges Targets in place: Progress made, more needed
2030: at least 10% In the short-term, pledges need to be strengthened to align with
2050: TBA net zero.
Progress: GHG emissions have reduced by 13% These need to be accompanied by capex plans/commitments, KPIs
since 2004. and milestones to achieve commitments.
Action being taken to meet 2030 pledges includes In the longer term, the strategic vision will need to focus on
commissioning of renewable energy (RE) facilities. A reducing other sources of emissions including the scope 3
major reduction in emissions will be enabled through emissions associated with its product line. New business and
the production of its own renewable energy facilities strategy announcement will be announced later in 2021.
which is already underway – this is a significant step
in terms of action as part of its pledges.
Energy and process efficiency improvements are
ongoing to enable short term emissions reductions.
Green Bonds in South Africa Climate Bonds Initiative 13Scope 3 emissions: For a full entity transition, As a first step, however, the major product lines green hydrogen initiatives”, and has plans to
entities also need to consider scope 3 emissions are listed below with some critical questions leverage its existing Fischer-Tropsch assets and
– and for those products with high scope 3 which will aid the understanding of the role of technology to support South Africa’s energy
emissions, how to transition away from these each product within a low carbon economy. transition.42 The Fischer-Trosch process, while
products into zero emissions alternatives. better known in the production of coal-to-
Future business activities:
Under the IEA SDS scenario, Sasol projects that liquids and gas to liquids applications is well
While Sasol’s current product mix is shown
its liquid fuel and coal demand will see rapid positioned to produce sustainable fuel and
above, this is not the full picture. Investments
declines – thus supporting a shift to different chemical products. The Fischer-Tropsch process
are being made now in new low carbon business
products in the medium to long term. We expect utilises hydrogen and carbon as feedstocks
lines including:
to see more strategic announcement on this in to produce a range of synthetic hydrocarbons
the coming months. Renewable energy - Sasol has announced plans such as aviation fuels and wax products.
to for a 900MW renewable energy roll out41 by Therefore, if green hydrogen is processed with
Individual activities and assets
2030 which will be shared with Air Liquide. While a clean carbon source, such as biomass, via the
Current business activities: Sasol is unlikely to market renewable energy as Fischer-Tropsch process this will result in green
Sasol’s current business model is a complex mix a product line, renewables as an input are a core / sustainable products.
of energy and chemicals. To analyse the whole part of its decarbonisation strategy. Green bonds
business per activity will require a much deeper could be used to finance these assets.
understanding each product, its potential to be
Green Hydrogen scale-up is another area
decarbonised and its utility within a 2050 low
where there is strong potential. Sasol are
carbon economy.
already working on proof-of concept green
It will also require a deeper understanding of scope hydrogen initiatives by repurposing some
3 emission (emissions made by other entities existing assets. Green/transition finance could
using products made by Sasol) for each product, be used to finance investment in assets and
some of which have high scope 3 and others projects relating to this part of the business.
which sequester emissions (negative scope 3). Sasol is already working on “proof-of-concept
Sasol: illustrative breakdown of activities (not exhaustive)
Product % Critical questions for transition finance
sub-category revenue
Liquid fuels and crude oil 31% Can this product be feasibly decarbonised in line with the Paris Agreement (including scope 3 emissions)?
Polymers 16% No:
Solvents 7% Are there any low carbon substitutes feasible/available?
Fertilisers 2% • If yes, transition finance is eligible for transition away from high-carbon activities to low
carbon substitutes
Organics 27%
• If no, transition finance is eligible for investments that reduce emissions from the activity as much as
Waxes 5%
possible, without locking in technologies that enable decarbonisation in the future
Advanced materials 4%
Yes:
Transition finance is available for any investments made to decarbonise the activity
in line with the Paris Agreement.
Coal mining 1% Coal mining is stranded and is not eligible for transition finance except for any measures being taken to
retire coal mines early.
Gas 3% The only eligible investments relating to gas are listed below
Green Bonds in South Africa Climate Bonds Initiative 145. Green bond models for energy investment
The green label can fit a range of different green
finance structures. The most relevant ones for
Advice for issuers considering a GSS bond
South Africa and the energy sector are listed here. Respondents were asked to share the wisdom 3. Choose a few high-profile
of their experience with other potential projects - to maximise impact
1. Sovereign/sub- sovereign GSS issuers. The notion of simplicity and streamline the reporting
sovereign green was a common message, and suggestions process.
bonds encompassed five categories.
4. Implement budgetary
Over 16 sovereign governments 1. Get a clear mandate from reporting standards - to
worldwide have issued green government – to ensure simplify the identification of
bonds to finance a range of different projects collaboration between all eligible expenditures.
including energy. The case for sovereign green stakeholders and give credibility
5. Prepare for the reporting
bonds is strong – particularly for emerging to the enterprise.
process - inform each
markets where investors may see the sovereign as
2. Design a robust and simple department of their expected
the first entity they would invest in a new market.
framework - choose indicators contribution well in advance.
Investors all around the world have indicated that the investment community The results will be closely
strong interest in sovereign debt, particularly is familiar with to ensure broad scrutinised.
from emerging markets. acceptance. A solid framework
will facilitate continuous commitment
For South Africa, this could be an option to
regardless of changes in government as well as
finance Eskom’s transition and could attract
simplify the reporting process.
cheaper finance than Eskom debt.
2. Corporate green
bonds to finance • Independent Power Producers can and 3. Green asset-
renewable energy have already issued green bonds to finance or backed issuance
refinance the construction of renewable energy
Green bonds have been issued While the majority of the global
projects as part of the REIPPP. The Redstone
all around the world by a green bond market is unsecured
Solar Thermal bond is one example of this in
range of entities to finance renewable energy. (backed on the balance sheet
practice.
Importantly, as green bonds are linked to assets of the issuer), asset-backed issuance can be
rather than entities, the ‘greeness’ of the issuing • Non-financial Corporates could also issue used to overcome credit constraints in some
entity is not generally an impediment to access green bonds to finance new renewable energy circumstances. Debt that is tied to growth areas
the green finance market (notwithstanding capacity additions – this could include smaller- is much easier to finance than entity level debt,
Transition finance comments below). scale rooftop solar for retail or office space or particularly for an indebted issuer.
larger scale production of energy inputs – such
Green bonds to finance renewable energy could Green ABS or project finance backed by the
as Sasol’s plans to build solar PV to improve
be issued by: quality of the renewable energy assets can
its energy mix or its plans to increase green
benefit from:
• Banks financing capital for renewable hydrogen production.
energy projects. Over ZAR200bn (USD13bn) • Reducing cost of renewable energy technology
was invested in renewable energy through
• Lower stranded asset risk
the first four REIPPP bid windows of which
65.8% was financed using debt. Further, to • Lower entity-level risk of issuer
meet the goals of the IRP 2019, an expected
• International investor interest for green and
ZAR99bn (USD6.8bn) will be invested in
renewable energy projects.
solar PV, ZAR271bn in wind and ZAR48bn in
distributed generation.43 This represents a Green ABS could be issued by a financing arm
huge opportunity for financial institutions to of a corporate or government-owned entity, a
issue green bonds locally and internationally project developer or financial institution. The
to finance their lending programs.44 key is that the balance sheet risk of the entity is
removed for the investor.
Green Bonds in South Africa Climate Bonds Initiative 15You can also read
