As corporates proactively implement measures to operate more responsibly and improve their Environmental, Social and Governance (ESG) performance, 2020 is shaping up to be a watershed year for sustainable finance in Africa.
The continent’s mining sector is likely to be among the adopters of sustainable finance products, particularly as mining groups and their supply chains seek to demonstrate their positive societal and environmental impacts – and secure their social licenses to operate for the long-term.
In fact, pursuing ESG policies and responding to the challenges of climate change are both seen as more important priority areas than growth for the global mining and metals sector this year, according to law firm White & Case’s latest annual survey. Less than 9% of respondents are pursuing growth as their leading goal for 2020.
While the sustainable finance market has started to gain serious traction in developed economies, it remains in its infancy in Africa, with only a few notable deals having been executed. Among those being East Africa’s first ever green bond, issued in late 2019 by Acorn Group for the purposes of developing environmentally friendly student accommodation in Nairobi.
But a step change in activity in coming months is anticipated. Standard Bank’s sustainable finance unit has seen a surge in interest from all sectors, including mining, and that momentum is expected to continue as investors demand action and transparency and corporates globally take more responsibility for uplifting and safeguarding society. The sharp rise in interest, points to pent-up demand for sustainable finance solutions in Africa.
These unique funding solutions will play an important role in helping Africa’s mining industry to overcome common challenges – such as energy supply, water treatment, environmental protection and mine rehabilitation, impending carbon taxes, community development, health and safety, and resilient infrastructure development.
Local miners are considering funding instruments such as social bonds to develop employee housing and infrastructure, or green bonds and loans to fund water treatment plants and renewable energy units.
These projects are not nice-to-haves – they are crucial for the sustainability of the industry. Consider how dependent mines are on water – a resource that is highly sensitive to climate change – and the urgency of such initiatives become clear.
According to EY’s 2020 report on the biggest risks and opportunities across the industry, ‘license to operate’ remains the most significant risk to the sector. Reducing the industry’s carbon footprint ranks fourth, while the need for innovation – to ensure access to energy and infrastructure, and to improve water management, among other needs – also features as a prominent theme.
And as regulatory requirements tighten and investor demands increase, corporates that avoid ESG issues face material risks. KPMG warned in a 2019 report that companies that fail to act could in time find it difficult to access capital. Furthermore, their stock valuations could be affected by their lack of ESG transparency, potential regulatory action, and weaker long-term performances.
Those that do take action have an opportunity to improve their ESG ratings, which in turn can lower their cost of capital. As such, sustainable finance not only enables future-proofing initiatives, but it also makes commercial sense.
There is a growing body of evidence that a stronger commitment to ESG issues is linked to a company’s outperformance over the long term, partly because operational risks are reduced.
As enablers of trade and investment, banks have an important role in encouraging the shift, which also needs to happen in the short-term supply and trade finance arena. This is why Standard Bank has been working with the International Chamber of Commerce’s Banking Commission to develop a framework that helps banks to develop sustainable trade finance practices.
Globally, the sustainable finance market is expanding at a rapid pace.
According to Bloomberg data, 2019 was a record year for sustainable debt issuances, with transactions worth at least $380 billion. This is an increase of 46.2% from 2018, with European governments and corporates driving much of the demand.
Green bonds remain the most popular form of sustainable financing product, although sustainability loans, green loans, social bonds and sustainability bonds are all garnering more attention.
This comes amid an increasing focus on ESG issues, particularly as institutions move to win back the trust of the societies in which they operate.
With confidence in governments low in many instances, the public is looking to the corporate world for solutions to societal problems. Those companies that fail to position themselves accordingly – by basing their decisions on long-term sustainability rather than short-term considerations – risk falling behind.
Like its peers, the mining industry has some way to go to change perceptions about its impact on the environment. Nevertheless, it is worth noting that the sector is playing an important role in the transition to a lower-carbon economy.
Platinum group metals and other metals such as manganese, cobalt and copper, for instance, are key components of electric vehicles and batteries.
And as mines become more sustainable, their products will contribute to the development of sustainable cities.
Sustainable finance will catalyse the transformation.
Nigel Beck, Head: Sustainable Finance and Mark Buncombe, Head: Mining and Metals for Standard Bank Group