The adoption of increasingly stringent renewable-energy and climate change targets globally will dramatically boost the issuance of green bonds, forecasts Fitch Group-affiliated BMI Research power and renewables head Georgina Hayden.
In the wake of the landmark United Nations (UN) 2015 Paris Agreement aimed at combating climate change and intensifying investments needed to sustain a low-carbon future, the South African government will continue to progress efforts towards reaching its Nationally Determined Contribution (NDC). These efforts have, to date, resulted in increased pressure on mining and metals companies to lower their carbon emissions.
BMI explains that mineral extraction and smelting are among the most power-intensive and environmentally disruptive industrial processes, placing the mining industry under stern social, investor and regulatory scrutiny. The mining industry having to transform its energy use will inevitably become the financially prudent approach to take. “We expect mines to increasingly integrate renewable-power sources into their mining operations as tightening environmental standards increase the costs of using polluting energy sources,” says BMI Research commodities analyst Molly Shutt.
BMI suggests that power supply uncertainty faced by South African mining companies makes independently sourced renewable-power plants an attractive option for the energy-intensive mining industry. However, potential start-up and running costs of renewable-energy sources and other methods for reducing carbon dioxide emissions may, at this stage, still seem daunting to mines. However, while these costs are admittedly high, and the options presented are long-term investments, “companies that are ahead of the curve in investing in clean power will see cost savings sooner and receive a reputational boost”, says Shutt.
The potential expense associated with going green may be vastly mitigated by mines that manage to attract green bonds. Green bonds refer to investments earmarked to fund projects that have positive environmental and/or climate benefits. The issuance of green bonds will increase proportionately with the ongoing galvanisation of global sentiment towards achieving stringent renewable-energy and climate change targets, says Hayden.
The total issuance of green bonds globally reached $115.5-billion in 2017, an investment increase of 78% in environmentally conscious projects from 2016, according to international nonprofit bond mobilisation organisation the Climate Bonds Initiative.
‘The Green Bonds Highlights 2017’ report, published late last month, also indicates an expected increase in sovereign issuances of green bonds from developing and emerging economies as governments look to finance climate-resilient infrastructure and meet their NDC commitments. The report states that the pioneers from 2016 and 2017 will be the case studies to encourage new entrants.
“A report prepared by Climate Bonds for the 2016 UN Climate Change Conference, in Marrakesh, Morocco, called for green bond issuance to reach $1-trillion by 2020,” adds Hayden.
However, BMI points to South Africa’s current regulatory uncertainty and stalled policy formation as key concerns for prospective investors in renewable-energy projects. “With the leadership of South Africa’s ruling party and the composition of the National Executive Committee split between two factions, the paralysis and uncertainty that have stalled policy formation in recent quarters is likely to continue,” according to BMI’s January ‘Industry Trends Analysis’. This political climate suggests that, while green bonds may be an appealing funding opportunity for the mining sector, finding willing investors in the South African context remains challenging.