Understanding the determinants of the development of the green bond market in South Africa

Abstract

PURPOSE: The study aims at establishing the level of interest in the green bond market by investors and specific factors that influence stakeholders' investment decisions in South Africa. DESIGN/METHODOLOGY/APPROACH: The primary data was collected through interviews leveraging survey questions from the Climate Bond Initiative survey and a thematic analysis conducted. Stakeholders involved in green bonds listed on the Johannesburg Stock Exchange were targeted. FINDINGS/RESULTS: Most respondents recognised green bonds as a critical enabler to support South Arica's energy transition and the clarity on South Africa's energy plan will catalyse investment. The study revealed a consensus for the application of strict definitions and standards for green bonds, whilst consideration should be given for leniency to increase issuances as the market matures. A barrier that was highlighted, was the slow development of a pipeline of large-scale projects. Majority of respondents indicated that beyond credit fundamentals; full or partial guarantees, subsidies and incentives will be most important in stimulating the development of the market. PRACTICAL IMPLICATIONS: There is strong potential to grow, as investors prefer green bonds with strong returns and green credentials. Incentives such as high tax rates for investments in fossil fuels, once-off incentives for new issuers such as anchor capital or subsidies to carry reporting cost can catalyse this growth. ORIGINALITY/VALUE: This study surfaces the underlying dynamics that contribute to the growth and development of the green bond market in South Africa that largely align with that of European and Asian markets. This presents an opportunity to explore strategies that could be translated to grow the bond market.