Climate change is widely acknowledged as one of the greatest long-term challenges facing humanity. To address this challenge, various high-level climate negotiations have taken place over the past decades to find solutions to accelerate adaptation and mitigation strategies.

The Conference of the Parties (Cop) has been at the forefront in the past decades of climate negotiations. After decades of back and forth it seemed like finally a breakthrough occurred with the 21st Cop, where the Paris Agreement was adopted in December 12 2015. The Paris Agreement has been regarded as historic because 195 countries unanimously agreed to limit global temperature increase well below 2°C. However, as ambitious as this agreement was, billions of dollars in investments are required to ensure that every country, particularly those in the global South, have the resources to step up and contribute towards combatting climate change.

Climate change has affected the global economy and it is not surprising that private capital has been mobilised towards green investments. One emerging finance mechanism has been green bonds. There is no standard definition of green bonds but they are generally referred to as bonds whose proceeds go directly into climate and environmental projects. The Climate Bonds Initiative and other organisations have been instrumental in helping the private and public sector issue and certify green bonds, as well as determine eligible projects to invest in.

The growth of the green bond market has been astounding, with a couple of issuances in 2007 to a growth of more than 80% of new issuers, amounting to more than $200bn in 2018. This growth has been acknowledged and promoted by credit ratings agencies such as Moody’s Investors Service, which have been at the forefront of green bond assessments.

Almost completely unknown a decade ago, now green bonds can potentially be a key solution to enable the world to transition towards a low-carbon society.

Most developed countries in the global North have taken advantage of the green bond market and incorporated it into their existing climate investment strategies, which have yielded positive results. Emerging markets in Asia have also been active in issuing green bonds, with China being the largest.

However, Latin America, the Caribbean and Africa are slowly lagging behind. This is cause for deep concern because, according to various climate reports, these are the most vulnerable regions to the effects of climate change.

Several reasons can be attributed to the slow growth of the green bond market in these regions.

First, investors always require a stable regulatory and economic environment where they are certain their investments will yield profits. With political uprisings in Venezuela right through to the effects of Cyclone Idai in Mozambique, it is not surprising that the green bond market has not taken off. Any investor would think twice about gambling with their money, especially in such circumstances.

Second, it is important to critically analyse the capacity of these governments to appeal to investors. In a 2017 report by the World Energy Council it was found that the dependence on fossil fuels in developing countries is set to increase. If these governments really intend ensuring they secure investments through green bonds, it is vital that the necessary arrangements are implemented to transition towards a low-carbon economy. This can prove very tricky, especially if resources, infrastructure and political will are lacking to enable this transition.

Despite the various challenges, it is important to acknowledge that there are massive opportunities for growth in these regions.

In Africa, SA is one of the leading countries with regard to the growth of the green bond market. The country witnessed the first municipal green bond, issued by Johannesburg in 2014, worth R1.5bn. The bonds have allowed the city to demonstrate its commitment to environmental stewardship, and proceeds are funding a range of projects in different sectors, such as low-carbon infrastructure. Following this, Cape Town’s green bond was the first in the country to be listed on the JSE green segment with a green bond issued of more than R1bn in 2017.

The resounding success of this green bond issuance resulted in the city being awarded “green bond of the year” by the Climate Bonds Initiative. The proceeds of the bonds have gone into the city’s climate change strategy such as water management and protection of coastal structures.

As much as the two leading cities in the country have demonstrated their potential in the green bond market, it is worthwhile pondering why they have not created a ripple effect in other cities. Could it be differences in political party mandates or a lack of awareness?

On the other hand, the private sector has shown an impressive stance in accelerating the growth of the green bond market in the country. The JSE’s green bond segment has been an effective tool set at international best practice to allow investors to contribute in raising capital for sustainable projects and boosting environmental, social and governance investment.

There have been several success stories of corporate companies, such as GrowthPoint Properties in 2018 being one of the first SA real estate companies to issue a green bond on the JSE of R1bn. Proceeds are reported to go into energy efficiency and green office buildings.

In 2019, Nedbank was the first corporate bank in the country to issue green bonds of more than R5bn in which all were oversubscribed and proceeds are expected to go into renewable energy projects. The fact that there was such a frenzy over these bonds demonstrates investor appetite and willingness to participate in this market. The private sector leading in the green bond market highlights how responsible investments have become a top priority, especially with regard to climate investments. Even though the green bond market is still small in SA compared to the rest of the world, it has the potential to increase.

One may ask what the growth in the green bond market essentially means for the country’s development. It is definitely a step in the right direction — green bonds are complementing the country’s policies and strategies with regards to climate action.

Like everything that is implemented, it is important that there is continuous monitoring and evaluation of the green bond market. This would entail both private and public sectors releasing annual reports on how green bonds have contributed to environmental projects as well as their contribution to the broader green economy framework. There is also a need for increased transparency and accountability from issuers to avoid instances of green bonds being labelled as “green washing”.

With the dawn of a new political era, it would be interesting to measure the effect of the growth of green bonds with President Cyril Ramaphosa set to make the country a hot spot for investments.

As much as unemployment, poverty and inequality will be top challenges to address, climate change and related investments also need to be in the pool of priorities. Green bonds may not be the biggest market in the country yet, but we are moving in the right direction — and this time we’re not lagging behind!

• Ngwenya is a PhD candidate at Wits University researching the role of institutional frameworks in promoting green bonds to finance carbon capture and storage in SA.