Greener pastures
Donwald Pressley
Treasury aims to spark debate about green-friendly money instruments, writes
Right in the middle of Covid-19 lockdown, the National Treasury issued a draft report proposing significant changes to the financial services industry investment regime — attempting to tilt future money flows towards “green-friendly” money instruments.
Ismail Momoniat, the Treasury’s head of tax and financial sector policy, confirms that his unit drove the report, but stresses that it is not a policy paper. He confirms that the report, “Financing A Sustainable Economy — Technical Paper 2020”, was put up on the Treasury website during the lockdown. It is aimed at fostering debate about sustainable investment and is a “draft report”.
Economist Azar Jammine describes the timing of the draft report as “fortuitous”. It just so happens to coincide with the imposition of the lockdown and the current debates about reshaping economic activities when the SA economy opens up again.
Jammine says the approach to green investment in the current climate could prove timeous as the government wants to be seen as supporting global green initiatives to get “brownie points”.
This would mean raising money more easily from global financial institutions — a critical consideration now that the government is raising funding for President Cyril Ramaphosa’s announced R500bn Covid-19 stimulus package.
This focus may open the doors to green bonds from the World Bank and the New Development Bank. It would be beneficial if SA could borrow at 1% rather than, say, 10%. “By performing exercises like this [the government will be seen] to address environmental needs.”
While the focus is on private capital in the report, green bonds may well be the way to go to provide alternative funding mechanisms for stateowned entities (SOES) — particularly power monopoly Eskom and municipalities.
Momoniat’s view is that it is early days in the debate of encouraging private capital — and the capital markets — in SA towards green investment. He emphasises that the draft paper makes no proposals regarding investment destinations. The paper has still to be thoroughly debated.
The Treasury report underscores that two major cities in SA have already taken a stab at green bonds: the City of Johannesburg and the City of Cape Town to promote green projects.
Recently Standard Bank sold a 10-year $200m green bond to the International Finance Corp via the London Stock Exchange.
Ian Neilson, mayoral committee member for finance at the City of Cape Town, is scathing about the green bond route. He says his city’s bond, a first for an SA municipality, proved more expensive than a “vanilla” bond. It was issued in 2017 and driven by then mayor Patricia de Lille. Neilson says Cape Town got the bond at much the same interest as any other bond, but it involved “a lot of administrative overload that you don’t need”.
Cape Town would have carried out the green projects anyway. Going the green bond route to raise R1bn “was the decision of the previous mayor … We tried it out. It was the hype thing at the time. There is no value to it.” The city still paid a roughly 10% interest rate, about the average for vanilla bonds.
It is too early in the process to know if the Treasury officials who drew up the draft paper has won over finance minister Tito Mboweni — or the cabinet.
The report coincides with lockdown and debates about reshaping economic activities
But a key section of the report is devoted to the suggestion that SA’S multitrillion-rand pension fund industry should be encouraged to promote a green economy.
While the report avoids mentioning Eskom in particular as a target for green bonds, it is argued that climate-friendly financial mechanisms like these are taking off globally.
In reference to the capital markets, the report says: “[Stock] exchanges should promote green, social and sustainability bonds and other product innovations, based on adherence to best-practice criteria and principles, to build [the] credibility of these instruments.”
Noting that the Reserve Bank recently joined the Network for Greening the Financial System, a voluntary network of central bankers, the green report says its objectives are, among others, to define sustainable finance for all parts of the SA financial sector, including banking, retirement funds, insurance, asset management and capital markets, and make recommendations for implementing sustainable finance in SA “through regulatory and industry actions”.
According to the report, it has been estimated that the cost of the global economic transition to a low-carbon economy “could be trillions of dollars”.
The Treasury writers, who took input from the Banking Association SA, the Banking Sector Education & Training Authority, the Council of Retirement Funds of SA and the JSE, among others, state that “transitioning” SA to a cleaner economy “will be both fiscally and economically expensive”. It will also have a social cost.
The country’s transition risk has been estimated at R2-trillion because of the significant exposure to a global low-carbon transition through exports, thermal coal and related infrastructure, power generation and synthetic fuel production.
The writers say managing the transition will “provide some means of mitigating the risk and finding upside opportunities”. In addition: “Mobilising the finance sector to invest in the necessary transition will require all participants in the financial services industry to contribute by screening for and disclosing environmental and social risks, financing new technologies and working in concert towards a more sustainable national economy.”
In the context of Cosatu and ANC support for imposing prescribed assets for pension funds, the appearance of the report, which devotes a section to what economist Mike Schussler refers to as SA’S R4.4bn pension “pot”, has opened the door to concerns that “prescribing” that bonds go “green” rather than ordinary “dirty” bonds (funding fossil fuel-funded projects) may make “prescription” politically palatable and, importantly, more acceptable to the trustees and managements of state pension funds. Those opposed to prescription are suspicious that this may be the Treasury’s intention.
Adamus Stemmet, spokesperson for the Association of Monitoring & Advocacy of Government Pensions, the watchdog over the R2-trillion Government Employees Pension Fund (GEPF), hopes the draft paper is not another avenue that would be used to promote prescription of assets. He is concerned the focus will shift again to asset prescription for pensions, just with different “Christmas paper wrapping”.
Stemmet — a retired official in the presidency — says: “Yesterday it [prescription] was [clothed as] protection of jobs, today it’s green bonds, tomorrow perhaps it is sky trains and teleporting or funding the Covid-19 destruction of our economy.”
He points out that any investment made by the GEPF had to be considered in the context of the GEPF’S declining reserves. As at March last year, its long-term funding was only at 75.5%. “On that date already the pension fund’s income was not sufficient to cover administration costs and the monthly payment of pensions. For this reason, 41% of the monthly contributions of serving members had to be used for these expenses.”
In the context of the report’s focus on sustainable economic aims, he says the GEPF’S purpose is to provide a pension for its members “and for no other purpose. It is not the milk cow of the government or anybody else.”
The Treasury report proposes that green bonds — described as fixed-income debt instruments which can be issued by governments, banks or corporates to fund projects that have positive environmen
Green bonds may well be the way to go to provide alternative funding mechanisms for state-owned entities
tal, social or climate impacts — could be the way to promote “sustainable” investment.
“The proceeds from these bonds are typically earmarked for green, social or climate projects and are backed by the issuer’s entire balance sheet. A taxonomy of acceptable projects or fund uses is applied to ensure that bond issuers are not accused of ‘greenwashing’ or raising funds on the pretext of environmental benefit,” it says.
The document also, however, does not dictate a green funding formula for Eskom. It instead focuses on the power of private “green” financing in developing SA’S renewable energy independent power producers programme. It notes that 112 projects “capable of delivering 6,422MW have been procured, spread across SA, and notably benefiting some of the poorest communities in the country in the Eastern Cape, Northern Cape, North West province and the Free State”.
Meanwhile, Eskom has taken note that green bonds may well be the route to go to fund secure clean energy alternatives like wind, electricity from gas, and solar exploitation rather than the coal power stations in Mpumalanga — especially those such as Camden, near Ermelo, Tutuka, near Standerton and Hendrina, near Middelburg.
Eskom spokesperson Sikonathi Mantshantsha says power stations older than 50 years are nearing the end of their working life. Eskom is looking for proposals, like at Camden, to convert gas into electricity, rather than from fossil fuels, in this case coal.
Noting that Eskom did not contribute to the green technical paper, he says green bonds “could be useful” to the SOE in the future. But he adds that at present Eskom is funded by existing bond issues, and is not in the green bond market.
Eskom is looking at using solar panel fields and converting gas to electricity. “Green bonds remain one of the future sources of funding that we will be looking at,” Mantshantsha says, noting that any take-up of these instruments by Eskom is governed by the state as shareholder.
Razia Khan, Standard Chartered chief economist for Africa and the Middle East, based in London, says that in Europe there is growing demand from the investor base — including pension funds — to seek assets that meet sustainability criteria.
Given that sustainable finance is increasingly becoming the bedrock of the asset management industry globally, there is broad-based consensus that it is going to be an increasing driver of financing decisions in the future.
She does not believe there will be a need for prescribed assets.
Issuing green bonds is a future option for Eskom “provided it can demonstrate a meaningful transition away from coal towards renewables. As an increasing number of asset managers are now prevented from investing in coal [globally], the transition to cleaner energy would make sense on both environmental and financing grounds.”
For Eskom to issue green bonds, it will have to ensure that its energy transition “meets climate financing benchmarks”.
Trend analyst JP Landman says the R450bn Eskom owes is not going to go away easily.
If Eskom could finance this debt at a cheaper rate than provided by local lending institutions, then reducing the cost of financing would be a big plus.
In Europe there is growing demand from the investor base — including pension funds — to seek assets that meet sustainability criteria