There is a small yet very significant distinction between the new JSE Sustainability-linked Bond and the JSE Sustainability Bond. In short, the new bond – which went live on 11 April 2022 – is linked to a sustainable outcome, whereas the existing bond follows a use-of-proceeds model.

‘This means all the proceeds raised from the Sustainability Bond must be exclusively used to fund projects that fall under the label of sustainability, which covers both social and environmental activities,’ says Altaaf Aboo, Bonds Specialist in the JSE’s Capital Markets division.

‘If an issuer wants to list, for example, a new low-cost housing development that is going to be completely solar-powered, that would fall under this label. On the other hand, our new Sustainability-linked Bond works like a normal bond, but unlike the use-of-proceeds product, you can use the capital that you raise any way you wish. However, while this is not limited to environmental or social activities, the interest or coupon rate of this bond is linked to pre-defined sustainability outcomes.’

These outcomes could be social objectives, such as job creation or gender diversity, or linked to environmental targets, such as the reduction of GHG emissions. Aboo gives the example of a power utility aiming to drop its emissions by 10%, which would then reduce the interest rate on the bond by 1%. Alternatively, if the company missed its emissions target, it would be hit with a 1% increase in interest rate. That way companies are nudged towards improving their sustainability performance.

‘Generally these numbers are much smaller and marginal for now, but that is likely to change over time,’ says Aboo, pointing to a recent forecast by S&P Global Ratings. Their analysts expect global issuance of sustainable bonds – including green, social, sustainability and sustainability-linked bonds – to surpass $1.5 trillion in 2022. And here, sustainability-linked bonds will be the fastest-growing segment of the market, according to S&P. This is partly due to these bonds not being ring-fenced for specific green or social projects, which makes them more flexible and accessible to issuers than use-of-proceeds instruments.

The appetite for this segment is also picking up in SA. Even before the JSE had launched its Sustainability-linked Bond, it had welcomed two self-labelled listings.

In March 2022, Netcare, together with Standard Bank, raised Africa’s first sustainability-linked bond in the form of a R1 billion, three-year, unsecured note. The hospital group is now aiming to achieve its linked sustainability targets (reducing its carbon footprint by procuring more renewable energy and further improving its water efficiency) to benefit from a lowered interest rate. In July 2021, RMB arranged the continent’s first sustainability-linked bond for a state-owned-company. Rand Water will use the capital raised from this bond to meet its ESG targets, including additional installed solar-energy capacity, increased number of people with access to safe and clean water, and greater female representation at senior-management level. As both of these bonds are self-labelled, they can be ‘passported’ on to the JSE Sustainability-linked Bond, if they fulfil all the rules and requirements.

There is already a strong pipeline of interest from institutional and private investors in the new Sustainability-linked Bond, which is being launched both on the JSE Sustainability Segment and the new JSE Transition Segment. ‘The [latter] will allow both the traditional use of proceeds bonds, such as the Green Bond, as well as the new Sustainability-linked Bond,’ says Aboo. ‘The overall interest in responsible investing is growing significantly.

‘I believe that in 10 to 15 years, the majority of people will demand to be only invested in sustainable activities. And that’s why we have to start building the sustainable investment products today.’

By Silke Colquhoun
Image: Gallo/Getty Images