Green financing is an opportunity for Africa
Sasha Cook and Anneke Lund
Over the past couple of years, we’ve seen a marked increase in ESG focus on deal making across Africa. This has led to more African banks, particularly in South Africa, establishing centres of excellence, with dedicated sustainable finance teams. This is a very exciting move, which will lead to further growth in the market.
Globally, we are seeing the volume of sustainable finance deals in the market growing fast. While African and other developing markets are still somewhat lagging developed markets, there is an increased focus on African markets due to the exposure to physical and transition climate risks, as well as social challenges, including the need to finance the infrastructure gap across the continent.
This has resulted in an increase in the number of syndicated loans being structured with sustainability-linked features. Some examples include the recently concluded transactions for Oceana Group and Greenlight Planet, where multiple funders participated in these structures.
In the debt capital markets, we have seen increased liquidity for sustainable finance deals through increased appetite from institutional investors and a widening of the investor base.
The investor community, and lenders alike, are applying increased scrutiny to these structures to promote standardisation and avoid greenwashing. The refinement of voluntary global principles, such as the International Capital Market Association (ICMA) and the Loan Market Association (LMA) principles covering the use of proceeds and sustainability-linked instruments, is helpful in guiding market best practice.
Trends moving forward
The COVID-19 pandemic has amplified the scale of global social challenges as countries grapple with the consequences of this crisis. As a result of this, together with the pre-existing social challenges faced by developing countries, we expect to see social key performance indicators (KPIs) emerge alongside the importance of environmental KPIs, and for these challenges to be addressed through the use of both proceeds instruments and performance-based instruments, such as sustainability-linked loans.
As the market continues to improve on reporting and transparency, we expect to see clearer and more detailed target setting. Tighter regulation is also expected over the coming months, with an increase in the establishment of taxonomies and policy making.
We may also see more activity at the sovereign, sub-sovereign, financial institution and corporate level in green bonds and loans, post-COP26, and funding the “energy leapfrog” for Africa.
Africa will require significant investment in energy projects and other basic infrastructure in the near future. This presents a great opportunity for sustainable finance, which can assist in unlocking these opportunities and support the mobilisation of development funds and other forms of capital towards these initiatives and projects.
Green financing is a foremost opportunity for Africa, both in the loan and capital markets. Currently, there is a wave of global funding ready to invest in renewables, but we lack bankable projects in scale. The solution lies in sector reform initiatives, and developing policy frameworks that enable rapid market growth in both centralised and decentralised energy.
Collaboration in the sector is key to achieving global goals, such as limiting global warming to within 1.5°C above pre-industrials levels. While the cost of a Just Transition for South Africa is estimated at R6bn, the broader cost of transitioning South Africa’s power system to net zero by 2050 is estimated at R3trn. This is a mammoth sum, and clearly cannot be funded through our fiscus alone.
In many of our key markets, there is a short-term dependency on fossil fuel revenue streams, and funding of the energy transition will need to be prioritised over other crucial fiscal spend.
The importance of blended finance cannot be stressed enough. Private and public sector partnerships call for closer engagement and planning between these parties, and prioritising the application of these funds.
The next decade is going to be “the decade of blended finance”, where significant energy transition funding is going to be needed, particularly in emerging markets. Public-private partnerships, with a significant pooling of capital from developed markets, will be required to unlock the transition pathway.
The momentum has really increased with regards to client interest and demand in sustainable finance and solutions that embed sustainability in their structuring. Standard Bank has been fortunate to close a number of market leading transactions in 2021, continuing our success of 2019 and 2020 in the sustainable finance space, where:
We partnered with Woolworths to conclude the first sustainability linked loan in the retail sector. This highlights Woolworths’ commitment to making a meaningful difference for the greater good of the planet and its people, with the funding embedding KPIs linked to reducing store electricity consumption, local sourcing in FBH and continued focus on sustainability attributes in Woolworths Food Products.
Standard Bank South Africa’s first social bond was arranged by Standard Bank in August. The R2bn issuance was significantly oversubscribed and cleared at a preferential price. Proceeds will be allocated to mortgage bonds in the affordable housing market, with a focus on female borrowers. It was apt that we closed this momentous transaction during Women’s month!
Green Light Planet – Standard Bank acted as sustainability co-ordinator on a deal that saw Stanbic Bank Kenya, Citibank, Norfund and CDC Group fund GLP facilitate expansion of access to off-grid solar solutions to low-income communities in Kenya. The deal embedded KPIs linked to financial inclusion, clean energy, and gender equality.
Given the heightened focus on ESG factors and sustainability, global investors continue to pursue opportunities that make a positive environmental and social impact.
Africa is well placed to become a major player in the global sustainable finance market. And given the continent’s massive funding needs, sustainable finance will play an important role in bolstering capital for high-impact projects.
Cook and Lund are Executives, Sustainable Finance | Standard Bank.