By Khurshid Fazel & Garyn Rapson, Partners at Webber Wentzel.
Green financing is likely to evolve over the next few years, with financial institutions increasingly requiring more accurate measurements of borrowers’ achievements against targets
Although the current focus in Africa’s growing sustainability-linked finance sector is very much on the “E” component of Environmental, Social and Governance (ESG) principles, the “S” and “G” aspects are expected to become more prominent over time as the sector matures.
It is evident South African corporates are showing a real interest in improving ESG standards. Environmental aspects are receiving most of the attention at present, partly because of the amount of research and discussion around climate change and partly because social impact is harder to measure, but the COVID pandemic has really balanced the scales.
Currently, domestic banks are still grappling with ways to roll out sustainability-linked finance and green bonds to their clients. Most domestic banks are engineering sustainability loans off traditional funding and adding appropriate sustainability-linked clauses to the agreement.
We expect the following themes to evolve over the next few years:
The need for green finance is not limited to capital projects but is also in demand to assist with clients’ ‘just transition’ plans, to help companies to transform the way they operate to become more environmentally friendly. Companies are making progress on sourcing more renewable energy, managing waste on site and being more efficient in their use of water and energy.
We see ESG compliance increasingly becoming a requirement for insurance companies, which, in the international market, are starting to engage lawyers or auditors to audit performance against a set of standards to test performance. Companies may, in future, struggle to access certain insurance products if they have poor ESG performance.
Reporting standards are becoming more complex and there is widespread concern about “greenwashing”. Banks will be held responsible for doing insufficient due diligence into potential clients before lending them sustainability/green finance. The necessity for due diligence extends beyond the client’s project to the client’s supply chains, for example if a borrower is seeking a loan for a solar photovoltaic project, the bank has to look as far as the source of the solar panels to ensure they were not made in a factory that uses child labour.
Traditional banks have historically lacked the internal expertise to measure and monitor clients’ compliance with ESG. This is changing and we are seeking banks recruit carbon and other ESG experts as monitoring and tracking of performance is becoming more important.
Over time, we expect step changes will occur in climate and other green tech solutions which are likely to be funded by sustainability-linked finance solutions. Similarly, internal ESG tracking, and governance solutions are emerging in a fast-changing technological advancement space.