ARVANA SINGH: Move to standardise sustainable finance across sectors
The challenge is to balance a one-size-fits-all approach with reporting for individual industry ambitions
There has been a move to standardise sustainable finance and sustainability-aligned frameworks, along with disclosure requirements and taxonomies. Arguably, the use of common terms and language will provide clarity and direction for organisations, investors and banking institutions. But how do we achieve a balance between a one-size-fits-all approach and a reporting framework that accurately measures individual industry ambitions? And where do financial players fit in?
First, definitions are critical, especially when an array of buzzwords are doing the rounds in the sustainability space. Adherence to environmental, social & governance (ESG) standards and frameworks is typically delivered through application and reporting and is focused on achieving a predetermined set of indicators.
There are notable differences between ESG priorities across sectors. A mining company operates a different business model than a company in the property sector, for example, and may have different and bespoke materiality dimensions for its specific industry and operations.
Having said this, national legislation and regulatory factors must be adhered to, and there should be a common set of objectives and shared impact metrics to strive towards that would be relevant in the context of a just transition. Ultimately, financial institutions can play a pivotal role throughout these stages, providing advice, guidance, expertise and finance.
SA’s green finance taxonomy was launched in April 2022. Drawing direction from the EU taxonomy, it provides SA with guidance on an official classification that defines a minimum set of assets, projects, and sectors that can be defined as “green”, in line with international best practice and national priorities. Industry players can then voluntarily choose to apply these benchmarks to demonstrate and track green activities. In doing so they help to achieve consensus that the activities are green and can be used as a tool to build confidence and help prevent “greenwashing”, a term used when entities portray their projects and actions as more environmentally sound than they really are.
Another development is the climate change bill, which seeks to enable the development of an effective climate change response from SA and should be released for public comment soon. Once enacted the legislation will aim to hold high-polluting industries accountable for their emissions through mechanisms such as penalties and the allocation of sectoral carbon budgets. It is essential that organisations fully understand the stipulations of the proposed act as well as the timelines and requirements.
The most apparent common focus area? Given the outcomes and commitments made at COP26, avoiding or reducing CO² emissions is high up on most company agendas. On its own, this factor is remarkably impactful. Several companies are following suit, setting targets in relation to this performance indicator.
Energy security is another shared ESG indicator of integral importance in the SA environment. Nedbank continuously partners with its clients to focus on sustainability targets, such as increasing renewable energy consumption as a percentage of the total electricity consumed. Not only does this have a positive environmental impact, but it helps to take pressure off the national grid, it is less disruptive to business operations and it can positively affect the bottom line.
For example, if a business installs solar photovoltaic (PV) technology to fund its operations, there is an upfront cost today, but the benefits are that the payback period is becoming shorter, there is less disruption to trading activity, and ultimately the potential to earn revenues will be less affected and savings will be generated in the long run.
This approach also allows organisations to shield themselves from potential inflationary increases in conventional electricity supply, and cost savings can be allocated to other productive uses in the economy, thereby supporting growth objectives.
Understandably, emphasis has been placed predominantly on environmental activities and objectives. Though this is important, attention must also be given to social components, including stakeholder engagement and the building of stakeholder trust and inclusion. The risks of not doing so could include community protests, consumer boycotts, regulatory fines, the disintegration of essential supply chains, and eventually doors closing.
From a governance perspective, diversity and composition of board and management structures prove vital ingredients to sustainable progress. This is another lever that companies should assess continually in aid of robust decision-making by relevant stakeholders.
Typically, a banking partner should conduct a materiality-mapping assessment exercise for the respective sector, drilling down to a specific client and its operations. What impact do they have from an environmental, social and governance point of view?
From this point of departure, a tailored solution can be created, working within the context of best practice principles, and setting ambitions relative to the client’s historical trajectory. It is imperative that companies do not just tick boxes for the sake of compliance, that greenwashing is avoided, and that additional impact is created.
While banks have an opportunity to raise awareness when it comes to an understanding of the just transition, they can also influence business thinking and shifts by partnering with clients to advise them on ESG opportunities and risks as well as on how best clients can position themselves to engage in, for example, sustainable-finance fundraising structures, and to achieve sustainable outcomes in the long run.
Additional innovations in which banks can engage include the structuring of innovative bonds. For example, in 2021 Nedbank introduced three first-of-their-kind green bonds to the market, following an inaugural green tier 2 issuance in 2020. In June 2021 a green additional tier 1 instrument was issued to support additional capital allocation into the Renewable Energy Independent Power Producer Procurement Programme. In July 2021 a green housing bond was arranged, and the proceeds are being used to fund mortgage loans to consumers who purchase units in green residential developments. In December 2021 a green residential development bond was structured and the proceeds are being directed at financing new green residential developments, targeted primarily at the affordable-housing sector.
These instruments were structured and arranged in collaboration with commercial investors and development finance institutions. In March 2022 the green additional tier 1 instrument was recognised as a winner in the ESG and Sustainable Finance Deal of the Year category at the Bonds, Loans & Sukuk Africa Awards, thanks to its impactful and pioneering nature. The green residential development bond also facilitates blended-finance sources, which are being used to finance green design and certification of green residential projects.
Ultimately, after having assessed ESG components, common metrics and specific criteria, companies will have to invest to reap the rewards of sustainable progress. The banking sector plays a pivotal role by connecting system players, keeping clients abreast of evolving trends, providing sustainable-finance solutions, and assisting clients in navigating the evolving landscape.
• Singh is head of sustainable finance solutions at Nedbank Corporate & Investment Banking.
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