Financial Mail

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

 ?? Picture: 123RF — VASYL NESTEROV ??
 ??  ?? Picture: 123RF — PAPAN SAENKUTRUE­ANG

Newspapers in English

Newspapers from South Africa