Sustainable development in Africa requires a new financing approach.
By Arvana Singh, Head of Sustainable Finance Solutions at Nedbank
Despite encouraging signs of progress in some sectors, the global pace in curbing carbon emissions is disappointingly still too slow to ensure African economies avoid the worst effects of climate change.
Efforts to boost climate finance are yet to show a significant impact. The latest figures from the World Resources Institute indicate that climate finance would need to rise to about US$5 trillion a year globally by 2030 to finance measures in combating climate change.
This level of financial commitment can also impose fiscal burdens, particularly on weak and developing economies, especially in Africa, where a myriad of social and economic projects compete for limited financial government resources.
Climate change is just one, developmental issue confronting Africa: the demand for decent accommodation; the worsening food insecurity; the poor road, rail and ports infrastructure; an energy crisis as evidenced by power cuts in countries like South Africa and Nigeria; and rising poverty and youth unemployment are all sustainability challenges confronting African governments.
Given these challenges, the role of funders, especially banks and development finance institutions (DFIs), has become more critical to enabling African economies to achieve the Sustainable Development Goals (SDGs).
Debt capital markets present an ideal mechanism to bridge this gap between the desire by companies and investors to contribute to the achievement of the SDGs and the specific investment actions that represent such a contribution. Bonds promoting activities that are positive for the environment (often called ‘green bonds’) are a proven way to mobilise the financial resources of capital markets and apply them directly in support of projects that address issues like climate change and energy.
The R2 billion Nedbank raised through a first-of-its-kind SDG-linked bond instrument that was listed on the green segment of the JSE on 30 June 2020, with the African Development Bank (AfDB) as the sole investor, has been a great example of how debt capital can be used to support sustainable development. This game-changing instrument illustrates how financial institutions can leverage their insights and funding expertise to deliver funding allocation towards activities that would positively impact the environment.
Importantly, and given South Africa’s power crisis, banks and DFIs can increase lending into renewable-energy sectors in line with the global environmental agenda and the SDGs through these financial instruments. This also contributes to the Light Up and Power Africa strategic development priority and has enabled the AfDB and Nedbank to deliver on sustainable development priorities and unlock significant developmental and economic value.
More recently, in 2021 Nedbank also issued a R910 million green additional tier 1 instrument and a R125 million unsubordinated green housing bond. The instrument was also a first of its kind by a financial institution on the African continent and was concluded in partnership with the commercial investor base in South Africa. The bond, the proceeds of which are being used to fund green residential mortgages, was floated on the JSE’s Sustainability Segment, a platform created for companies to raise debt for green, social, and sustainable objectives. It is a unique innovation in the capital markets space that would further drive the green agenda forward by using the proceeds to support additional financing solutions for consumers buying into green-certified developments.
Yet another historic example of developing innovative sustainable finance solutions is the Nedbank Renewable Energy Bond, the first such SDG-focused capital market instrument in South Africa, developed in 2019. It capitalised on our extensive experience in the sector, which includes funding 42 of the transactions, worth R40 billion, across the four rounds of the country’s Renewable Energy Independent Power Producers Procurement Programme (REIPPPP).
The Nedbank Renewable Energy Bond, an unsubordinated green bond and SDG-linked bond instrument, demonstrates the evolving nature of impact investing. The ability to demonstrate a primary focus on making a positive, sustainable difference to the environment will become a key ticket to unlocking further value in the economy.
Ultimately, a sustainable society is fast becoming a prerequisite for sustainable investment returns. For banks, DFIs, and asset managers this means providing sustainable development finance by using our financial expertise, lending, and investment capabilities to deliver on relevant SDG targets. Green bonds are a viable way to shift funding at scale to where it is needed most, in doing so creating this symbiotic relationship between society, the planet, and the economy for the benefit of all three. As African economies grapple with the impact of climate change and other developmental issues, banks and development finance institutions must support those countries with the financial and technological resources to address these issues. The further innovation of debt capital markets to fund sustainable development is one of the greatest opportunities available to funders today.