Editor’s note: This is general educational information about how green bonds are labelled and reviewed, not investment advice, and it does not endorse any instrument or issuer. It is based on the official documents listed at the end.
Analysis: what the verification chain does and does not certify
The chain is honest about itself if read closely. Every link is voluntary, and the enforcement that exists is borrowed from elsewhere. Under section 11 of the Financial Markets Act, 2012, an exchange must make listing requirements prescribing the requirements with which issuers must comply and the standards of disclosure they must meet, and those requirements and any other conditions of listing bind the issuer and its directors, officers, employees and agents. That is the mechanism by which a voluntary set of Paris-drafted principles acquires teeth in Johannesburg: not because the Principles are law, but because a listing condition is.
The consequence is that a green label is a statement about a process that a private reviewer examined, at a point in time, against criteria the issuer selected. A pre-issuance opinion covers a framework, not the projects that will eventually be funded. A post-issuance verification covers tracking and allocation, not whether the funded projects delivered the environmental outcome. Treasury’s own framing of why taxonomies exist makes the risk explicit: a taxonomy of acceptable projects is applied so that issuers are not accused of raising funds on the pretext of environmental benefit.
The South African record also shows why proceeds-based labelling drifts. The early issuances were infrastructure and municipal, with identifiable physical projects behind them. The move to a sustainability segment in July 2020 widened the category to social and sustainability bonds, and the Principles themselves note that eligible green projects may have social co-benefits and that the classification is the issuer’s call. The wider the eligible set, the more work the external review has to do, and the more the identity and scope of the reviewer matters.
A reader assessing a South African green bond therefore has three documents to find rather than one label to trust: the framework, which states the eligible categories and the look-back period for any refinancing; the pre-issuance external review, with its stated scope and the provider’s credentials; and the post-issuance allocation verification. Where the third is missing, nothing has yet confirmed that the proceeds reached the projects the first two described.
What the documents say
There is no statutory definition of a green bond in South African law. There is no regulator that certifies one. What exists instead is a voluntary framework written by a bond market association in Paris, a listing segment on the Johannesburg Stock Exchange that requires alignment with it, and a set of private review providers whose opinions do the work most people assume a regulator does. Knowing which of those actually checked what is the whole exercise.
The label is a definition about proceeds, not about the issuer
The International Capital Market Association defines a green bond as any type of bond instrument where the proceeds, or an equivalent amount, will be exclusively applied to finance or re-finance, in part or in full, new or existing eligible green projects, and which is aligned with the four core components of the Green Bond Principles. Those components are use of proceeds, process for project evaluation and selection, management of proceeds, and reporting. The 2021 edition adds two key recommendations for heightened transparency: green bond frameworks and external reviews.
The definition says nothing about the issuer. A company with a high carbon footprint can issue a green bond, because the label attaches to where the money goes. The Principles state that the cornerstone is the use of the proceeds for eligible green projects, appropriately described in the legal documentation of the security, with clear environmental benefits assessed and, where feasible, quantified by the issuer. Where proceeds refinance existing assets rather than funding new ones, issuers are asked to estimate the share of financing against re-financing, clarify which portfolios may be refinanced, and give the expected look-back period.
The Principles also acknowledge the categorisation problem directly. Eligible green projects may carry social co-benefits, and it is the issuer that determines whether a use of proceeds bond is classified as green based on its primary objectives for the underlying projects. Bonds that intentionally mix eligible green and social projects are sustainability bonds under separate guidance, and sustainability-linked bonds work on an entirely different logic, with proceeds used for general purposes and the structure hung on key performance indicators, sustainability performance targets and a verification component.
Who checks, and at which point
The Principles recommend that issuers appoint one or more external review providers to assess, before issuance, whether the bond, programme or framework aligns with the four core components. That is the pre-issuance review, and it covers process rather than outcome.
A second review is recommended after issuance. Management of proceeds should be supplemented by the use of an external auditor, or another third party, to verify the internal tracking and the allocation of funds from the proceeds to eligible green projects. The Principles keep the two apart because they answer different questions: whether the framework says the right things, and whether the money went where the framework said it would.
Reviews are not standardised by any authority. The Principles direct issuers to the Guidelines for External Reviews, a market-based initiative developed to provide information and transparency on review processes, and they encourage review providers to disclose their credentials and relevant expertise and to communicate clearly the scope of what they reviewed. Issuers are asked to make external reviews publicly available on their website or another accessible channel, and to use ICMA’s template.
Issuers are also encouraged to disclose any taxonomies, green standards or certifications referenced in project selection, and may refer to the five high level environmental objectives of the Principles: climate change mitigation, climate change adaptation, natural resource conservation, biodiversity conservation, and pollution prevention and control.
The South African record
National Treasury’s technical paper on financing a sustainable economy sets out how the local market developed. The Industrial Development Corporation issued a R5bn bond for clean energy infrastructure in 2012. The City of Johannesburg became the first local municipality to list a green bond on the JSE in 2014, a R1,46bn issuance financing initiatives including biogas to energy and a solar geyser programme, and the City of Cape Town’s R1bn green bond was directed at projects aligned with its climate change strategy, including measures to secure long-term water availability.
The exchange formalised the category in 2017, when the JSE opened a green bond segment. The first issuance in it, by Growthpoint, was a R1,1bn bond with 5, 7 or 10 year tenors. In 2019 Nedbank became the first bank to list a green bond on the JSE, with proceeds ring fenced for renewable energy; it attracted R5,5bn in bids and the issue was increased from R1bn to R1,7bn. As of July 2020 the green bond segment was expanded into a sustainability segment, allowing social and sustainability bonds to list alongside green bonds.
The paper places that in context. The Sustainable Stock Exchanges Initiative lists 102 member exchanges with more than 52 000 listed companies and a combined market capitalisation upwards of USD 88 trillion, of which 32 exchanges with a market capitalisation of USD 28 trillion have green, social or sustainability bond listing segments, South Africa being the only African exchange in that group. Treasury also records that the exchange listing eligibility question is answered by reference to external frameworks: the Luxembourg Stock Exchange, which listed the first green bond in 2007, recognises the Green Bond Principles, the Social Bond Principles, the Sustainability Bond Guidelines, the Climate Bonds Initiative eligibility taxonomy and the People’s Bank of China endorsed projects catalogue.
