In May 2020, the National Treasury released a technical paper titled “Financing a Sustainable Economy”, the aim of which was to provide an overview of the essential legislation, trends, developments, risks and opportunities for the constituent components of the SA finance sector.
One of the recommendations was establishing a “taxonomy” to assist in building credibility and consistency in sustainable investments, along the lines of the EU’s green taxonomy. The initiative supports complementary efforts by other private and public sector actors, including the JSE’s recent expansion of its green segment. Taxonomies of this nature set out sector and activity-based criteria that enable regulators and investors to sort the wheat from the chaff when it comes to identifying, financing and developing green and socially inclusive projects.
This will prove critical for President Cyril Ramaphosa’s ambitions to use the Infrastructure Fund to leverage R1-trillion in strategic infrastructure projects over the next decade, as outlined in his new Economic Reconstruction and Recovery Plan.
With global flows of green and sustainable finance increasing 78% between 2018 and 2019 and environmental, social & governance (ESG) investments demonstrating their ability to retain finance while non-ESG funds tanked during the Covid-19 sell-off in April, international investors are putting their money where their mouths are when it comes to climate change. SA urgently needs to get on board this train.
The World Bank estimates that $1.38-trillion is needed for climate mitigation in SA, and $308bn for climate adaptation if we are to avoid climate catastrophe. The International Finance Corporation (IFC) estimates potential for $558bn of climate business investment by 2030, including investments in renewable energy, transportation, energy efficiency, waste management and green buildings. With the fiscus in tatters, Ramaphosa must recognise the centrality of these financial flows in boosting job creation and economic growth while contributing to greater economic and climate resilience.
It is therefore a great relief that tremendous headway has been forged by the consortium tasked with developing the SA green taxonomy. Businesses operating in the targeted sectors have been invited to comment on the draft document as part of a series of consultations during October and November.
Working under the guidance of the Treasury and IFC, the National Business Initiative and the Carbon Trust have developed a suite of draft technical screening criteria for projects in agriculture, forestry and fisheries; manufacturing; energy; water; waste transport; information, communication and technology; and construction. The criteria draw heavily on international experiences of developing such taxonomies, but are aligned to domestic legislation and are cognisant that finance is not only needed for the green technologies of tomorrow, but also for the investments that will facilitate the transition.
Approved activities will need to follow five guiding principles to qualify under the taxonomy, including contributing substantially to environmental objectives; not doing significant harm; complying with minimum social safeguards; meeting applicable technical standards; and being resilient to physical climate change impacts. If only these principles had been in place back in 2010 when the World Bank saw fit to issue SA with a disastrous $3.75bn loan for Medupi....
While significant strides have been made in creating fertile ground for green investments to take root, important issues must still be navigated. An appropriate oversight structure must still be identified to ensure the maintenance of the taxonomy as technology advances, as well as to ensure alignment between green intentions at the time of investment and actual use of proceeds.
The state must evaluate appropriate tax incentives or classification cost-mitigation strategies to incentivise subscription, and there is still work to be done on alignment with the newly promulgated carbon offset administration system. That said, to have progressed so far in five short months is quite an achievement and bodes well for our national ability to tap into new sources of development finance.
• Maguire holds a master’s degree in global change studies from Wits and has been developing green economy solutions for the private sector, NGOs and the state for more than a decade.
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