By Patrick Heron and Joon Chong from Webber Wentzel
National Treasury has launched South Africa’s first Green Finance Taxonomy, which will help investors and financial institutions make more informed decisions on “green” projects
On 1 April 2022, National Treasury (NT) launched South Africa’s first Green Finance Taxonomy (GFT). This is an official classification that defines a minimum set of assets, projects, and sectors as eligible to be defined as “green” or environmentally friendly. The taxonomy also lists the standards that define economic activities as “green”.
The Green Taxonomy followed NT’s publication in 2021 of the technical paper “Financing a Sustainable Economy”, focusing on climate risks and the opportunities for the financial sector to make a positive contribution to green objectives and facilitate the transition to a low-carbon economy that is socially inclusive and sustainable.
The following are the main points made by key speakers at the event.
Climate change is recognised as the biggest threat that world faces today. In the wake of the Covid-19 pandemic, the rebuilding of society not only needs to be done in a sustainable manner, but also in an equitable manner. Investors and institutions are, therefore, becoming increasingly concerned about the environmental impact and sustainability of their investments. This has resulted in a shift in global finance and capital flows towards projects that are sustainable, and which embody the principles of Environment, Social and Governance (ESG). Examples of this trend that were mentioned in the meeting include:
- the JSE observing that sustainable finance is one of the fastest-growing forms of finance on the international stage;
- the success of and significant increase in green bonds, especially on the African continent. This has resulted in a surge in the issuance of other types of sustainability-focused bonds, such as blue bonds, social bonds and gender bonds; and
- the rise in investment in sustainable equity.
The EU Sustainable Finance Taxonomy served as the foundation for the development of the GFT due to its technical content and how it has influenced the expectations of international investors. The focus of the first edition of the GFT is climate change, but it is intended that it will extend to further issues in the future, such as issues concerning biodiversity and effective land-use. The objectives of the GFT are to:
- to support a future economy reference;
- to be a tool to drive change; and
- to be a communication enabler.
These objectives have been established without requiring any trade-offs and the GFT is not intended to be a replacement for ESG management, due diligence practices and fiduciary duties or investment and finance strategies.
The GFT was described by the key speakers as being “incredibly important” for South Africa. It will be critical for attracting future international investments and capital flows into the South Africa and providing access to a deeper pool of liquidity at competitive prices. It will also provide a foundation on which the financial sector can develop financial instruments which will complement the GFT framework.
The GFT will also be critical for promoting transparency and accountability in the market. It will allow investors, lenders, financial institutions and other participants in the financial sector to demonstrate their green credentials and practices and will provide participants in the financial sector with a standard against which they can test these credentials. The GFT will, therefore, serve as a robust bulwark against the risk of greenwashing and will help boost investor confidence and certainty by allowing them to make more informed investment decisions.
The launch of the GFT represents an important step for South Africa towards a more sustainable future. It demonstrates that South Africa is committed to developing an economy that is environmentally sustainable and socially inclusive. The GFT and its future iterations will, therefore, serve as a critical component to South Africa’s transition to more sustainable and socially inclusive economy.