South Africa is a party to a number of international environmental agreements, including the UN Framework Convention on Climate Control (“UNFCCC”), 1992, the Kyoto Protocol, 1997 and the Paris Agreement. In terms of the Paris Agreement, governments have made a commitment to ensure that global average temperatures remain below 2°C above pre-industrial levels. For South Africa, a country that relies heavily on fossil fuels to generate energy, this is a mammoth task.

Over and above enacting an enabling legislative framework that allows governments to meet the commitments under the Paris Agreement, the transition to a low-carbon economy also requires significant capital investments in alternative clean sources of energy such as solar, wind and hydropower. Green bonds are defined by the International Capital Market Association (“ICMA”) as any type of bond instrument where the proceeds will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible Green Projects (this is not defined but is understood to be projects or activities with climate or environmental sustainability purposes). These have the potential to play a key-role in the transition to low-carbon economies.

Green Bond Principles (“GBPs”), which were established in 2014 and are reviewed on an ongoing basis, set out voluntary guidelines applicable to the issuing of green bonds. There are no universal GBPs, but various entities, such as the People’s Bank of China, have developed their own guidelines. However, it is widely accepted that many issuers of green bonds follow the GBPs developed by the ICMA. The GBPs consist of four components, namely:

1. use of proceeds
2. process for project evaluation and selection
3. management of proceeds
4. reporting

The main categories of what constitutes green projects includes;

• renewable energy and energy efficiency
• pollution prevention and control
• sustainable land use
• biodiversity conservation
• clean transportation
• climate adaptation

This is a clear incentive to build climate-change business resilience.

The GBPs promote accountability in the financial sector and transparency through better environmental disclosure and evaluation methodologies applicable to green projects.

The rate at which green bond markets develop is largely dependent on various factors, including policy and regulatory factors. South Africa’s climate change-related legislation (this includes the Integrated Resource Plan, 2019, the Carbon Tax Act, 2019, and the seminal case inEarthlife Africa Johannesburg v Minister of Environmental Affairs & Others, which set aside the environmental authorisation for a coal-fired power station, on the basis that inadequate consideration was given to the project’s climate change impacts) provides an enabling environment for investors to issue green bonds.

In recent years, there has been an increasing recognition that banks and financial institutions have the power to influence the transition to low-carbon economy. Recently, Standard Bank became the first Bank in South Africa to publish a policy on the funding of thermal coal mining (“Coal Mining Policy”). The Coal Mining Policy covers:

“(1) the provision of financial products and services to thermal coal mining projects (new and expansions) and all associated mine-site activities (from planning, development, processing, rehabilitation and mine closure); as well as

(2) the provision of financial products and services to existing and new thermal coal mining corporates involved in the ownership, development and operation of thermal coal mining assets. Under the new policy, Africa's biggest lender requires all its thermal coal mining clients to comply with domestic legislation and the environmental, social and governance (ESG) regulations of the countries within which they operate.”

Financial institutions, most of which are signatories to the Equator Principles, which provides “a minimum standard for due diligence to support responsible risk decision-making” in respect of environmental and social risks, must recognise the role they can play towards transitioning to lower carbon economies, including endorsing and issuing green bonds.

Lloyd ChristieExecutive Natural Resources and Environment[email protected]+27 82 210 2159

Zinzi LawrenceCandidate Attorney Natural Resources and Environment[email protected]+27 66 476 0776