Sovereign debt instruments: Internationally, RI practices to sovereign debt has evolved over the past few years and all the major international credit rating agencies now apply ESG integration into their Sovereign Credit Rating. This can be based on factoring in issues such as social cohesion, climate change, energy security, food security, water scarcity, as well as global standards such as Transparency International’s Global Corruption Perceptions Index and other frameworks, into the assessment of a state’s long-term credit worthiness.
Corporate debt instruments: The application of ESG considerations to corporate debt is much more advanced, albeit not yet as mainstream as ESG in listed equities. RI styles that can be applied to corporate debt include negative screening, positive screening and ESG integration. The predominant trend is towards ESG integration: amongst other things, ESG factors can help to assess regulatory-environmental risks facing companies, controversy risk, and managerial quality.
Thematic bonds: The fixed income asset class has also attracted significant attention from the point of view of thematic investment in activities with positive environmental and/or social benefits. An example of an instrument growing in popularity internationally are the Green Bonds, which has the longest history in terms of the thematic bond market, but also growing in popularity are Social Bonds, Sustainability Bonds and SDG Bonds.
Green Bonds are regular bonds with one distinguishing feature: the proceeds are allocated exclusively for projects with environmental benefits (understood to be intrinsically coupled with social co-benefits). In other words, financially, green bonds are the same as regular bonds, offering comparable risk/reward profiles and following the same issuance procedures but the proceeds are used for a wide variety of green projects and can be issued by any company across all sectors, apart from fossil fuel-based activities.
The recent surge in green bonds has been driven by strong investor demand given their commitments to national and international climate and sustainable investment agreements and initiatives, coupled with the fact that fixed income represents a large portion of many asset owners portfolios and is a familiar and relatively safe asset class that can be a good starting point for RI strategies.
A number of green bonds have successfully been issued in South Africa to date, including by the Municipalities of Johannesburg (2014) Cape Town (2018), GrowthPoint Properties (2018) and Nedbank (2019).
Publicly traded Green Bonds are available on the Johannesburg Stock Exchange Green Bond segment.
Overview of different types of thematic bonds:
A bond labelled as ‘green ‘or ‘environmental’ where bond proceeds are directed to projects or assets with environmental benefits (these benefits are understood to be coupled with social co-benefits).
A subset of green bonds where proceeds are directed to projects/assets that have specific climate benefits. The Climate Bonds Initiative provides a certification system for Climate Bonds.
A bond where the proceeds are used for projects and assets with positive social outcomes such as health care and education.
Sustainability Bonds and SDG Bonds
A bond that is financing a range of both social and environmental projects/assets. An SDG Bond invests in projects and assets that are aligned and contribute to the achievement of the United Nations Sustainable Development Goals.