Bigger targets needed to spur premium for South African projects

South African companies looking to issue green bonds or raise capital for climate-friendly projects have a better chance of getting preferential rates if they set ambitious targets that surpass market expectations.

“In order to benefit, it should be a stretch target because that speaks to the ongoing sustainability of an entity in the longer term for which they should be rewarded with a slightly lower cost of capital,” Olga Constantatos, head of credit at Futuregrowth Asset Management, said at a Bloomberg event on Wednesday.

The popularity of green assets and alternative investments is rising as investors seek to diversify their portfolios and possibly earn the “greenium” – a premium associated with climate-friendly assets. In South Africa, the spread is significantly lower.

A Nedbank, study in 2022 found that unlike Europe, where bonds linked to sustainable assets enjoy a significant premium, in South Africa they are priced almost in-line with more traditional debt, with spreads of as little as five basis points. That’s hurting efforts to ramp up green projects in a nation that depends on coal for more than 80% of its electricity.

“What’s missing are the bankable deals,” Constantatos said. “What’s missing is the policy clarity, the policy coherence, the policy action and some of the reforms – which while are happening arguably, but is it enough?”

Fixed investment in South Africa dropped by almost a third in the six months to June to the lowest level in four years, as persistent electricity outages, rising interest rates and cost pressures weighed on profitability and eroded business confidence. As a result, the private sector has been hesitant to expand production capacity and is delaying major investment plans.

While South Africa likely avoided a contraction in the second quarter according to a survey of economists by Bloomberg this month, economic growth will probably remain subdued as record power cuts and logistical constraints limit productivity and the movement of goods.

The nation’s low-growth environment has stifled investor sentiment, effectively resulting in a liquidity trap, Mamokete Lijane, a global markets strategist at Standard Bank Group, said at the event.

“We are an economy that is ex-growth and has been ex-growth for a decade,” she said. “There aren’t a lot of investment opportunities, so you can’t go into equities, there aren’t a lot of companies that are investing, that are issuing paper, so all this liquidity is trapped.”

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