In the face of global climate change and the worst drought in living memory, the City of Cape Town issued South Africa’s first true green bond last month (August). The proceeds of the hugely successful issuance will be used to fund and re-finance green projects in the city including its emergency water supply schemes designed to address a severe drought which has resulted in the city’s dams reaching worryingly low levels. By Angela Mokone
The city was able to raise its targeted R1-billion from eight allocated bidders having received bids of almost R5-billion from 31 different bidders. The bond has a 10-year term and was issued at a spread of 133 basis points over the R186 government bond.
The City of Cape Town’s Green Bond is the only green bond in the country to be accredited by the Climate Bonds Initiative (CBI), a global organisation that promotes investment into climate change solutions and provides green bond certification, and certified by ratings agency Moody’s as GB1 which it terms as “excellent”.
The CBI accreditation process involved a comprehensive, in-depth pre- and post-issuance assurance by an independent verifier approved by the CBI. In addition, the city has undertaken to provide ongoing reporting to the bondholders on the application of the use of proceeds. These initiatives assisted in providing investors with the requisite comfort regarding the ultimate use of proceeds. The Moody’s certification was also important as it highlighted the city’s long-term strategy of adapting to climate change through investments in water, sanitation and transportation projects.
Cape Town’s green bond supports the city’s stance on climate change and its commitment to a water resilient city. Emergency plans to boost water supplies during the current drought include accessing the Table Mountain aquifer, a temporary offshore small-scale desalination plant and intensifying the city’s pressure and demand management programmes while also introducing a R120-million small-scale waste management plant. Medium- and longer-term programmes include encouraging new design, innovation and technology in public infrastructure and private households to enable water saving procedures.
Some of the specific water saving initiatives to be financed by the City of Cape Town Green Bond include upgrading of reservoirs, the implementation of pressure management systems with zone and valve metering, treating effluent to transform it into potable water, and replacing and upgrading sewers and sewer pumps.
Only three climate-related bonds have been issued so far in South Africa. However, as issuers and investors look to their sustainability ratings and corporate social responsibility initiatives, the popularity of these issuances is expected to increase. The issue of green bonds will also be encouraged by the launch of the Green Bond Segment by the Johannesburg Stock Exchange (JSE) in September where green bonds, which comply with its criteria, can be listed on the exchange. The segment is expected to cater for institutional investors who are increasingly demanding socially responsible investment opportunities to address their environmental, social and governance mandates and for retail investors who prefer sustainable investments. It also provides bond issuers with the opportunity to brand themselves as socially and environmentally responsible corporate citizens.
Though still relatively unknown in South Africa, climate-aligned bonds and green labelled bonds are already prevalent internationally with an HSBC report estimating US$696-billion climate-aligned bonds – defined as bonds used to finance low carbon and climate-resilient infrastructure – issued to date,
Although internationally over 60% of climate aligned bonds are issued by government entities, opportunities exist for corporates across a number of sectors. Financial institutions have been an obvious fit for green bonds in the past, with the proceeds often being directed at green project finance deals, but large corporations such as Apple Inc (US$1-billion issued in June 2017 to finance renewable energy and energy efficiency at its facilities) have also made use of green bonds as a source of funding, potentially accessing a different pool of green capital.
Rand Merchant Bank (RMB) acted as lead arranger for the City of Cape Town Green Bond, which included a national investor roadshow that was embarked in in June to market the issuance. Although the local green bond market is still in its infancy stage, the issuance created tremendous investor interest which will hopefully translate into increased demand for this growing asset class.
Angela Mokone is a Debt Capital Markets transactor at Rand Merchant Bank.