ESG: Issuing a Social Bond in South Africa

ESG and SA Taxi

By agreeing to a far-reaching set of social goals, the JSE-listed company was able to improve their cost of capital and attract the attention of a new set of institutional investors.

Op-ed by Africa.com Chair, Teresa Clarke

One of the largest developments in global capital markets over the last several years has been the rapid rise in institutional investors’ appetite for ESG (environmental, social & governance) investments.  According to the Bloomberg Sustainable Finance Market Outlook, in 2021, more than $1.6trn in sustainable debt instruments were issued, setting a new record and bringing the total market to over $4trn globally. The leap in this market in 2021 reflects an 87% annual growth rate since 2013.

Some African companies are following this trend, and finding that they can do well by doing good. That is what happened when SA Taxi issued its landmark R900m [approximately $55m] series of social bonds. By agreeing to a far-reaching set of social goals, the JSE-listed company was able to improve their cost of capital, and attract the attention of a new set of institutional investors who seek ESG investments.

“We decided to issue a social bond because we are privileged to be making an impact on bettering public transport, enabling financial and social inclusion and enhancing climate resilience,” said SA Taxi CEO, Terry Kier.

Robust social framework

SA Taxi is South Africa’s largest lender to taxi drivers for the purchase of minivans – South Africa’s de facto public transport system that moves 15m people daily. SA Taxi’s bond issuance was heralded as one of the first, largest and most comprehensive transactions of its kind in Africa. In order to access this rapidly growing pool of investment, the issuer of the bonds, SA Taxi, developed a robust social framework to communicate to investors, and other stakeholders, how the use of the bond proceeds would have environmental and social impact on South Africa.  

In addition to developing the framework, SA Taxi sought an independent opinion on the framework from the rating agency, S&P Global, who now offer ratings not only on creditworthiness, but specifically on the issuer’s ESG framework. Much like a credit rating, the independent ESG opinion gives investors confidence in the issuer’s capacity to achieve the sustainability goals.

“Our Sustainable Financing Opinions help companies like SA Taxi provide investors with greater insight into how their investments will impact and align with environmental, social and sustainability goals. This helps issuers attract more investors and a greater amount of capital as an increasing amount of investment is directed to companies working to transition to Net-Zero and be in alignment with the Sustainable Development Goals,” said Susan Gray, Global Head of Sustainable Finance and Innovation, S&P Global Ratings Services.

Core components align with internationally established principles

The SA Taxi Social Framework is aligned with several components of the Green Bond Principles and the Social Bond Principles, both of which were established by the International Capital Markets Association, a global not-for-profit association of over 600 capital markets players, headquartered in Switzerland. The core components of SA Taxi’s sustainable bond framework are:

  • Use of proceeds – the proceeds from the approximately $55m bond offering are being used for green and social projects, and financing necessary infrastructure important to development – namely, safe and reliable public transportation.
  • The process for project evaluation and selection. SA Taxi is committed to clear internal policies that govern the selection of eligible uses of the proceeds.
  • Management of proceeds – SA Taxi agreed to track and manage proceeds from the bond offering in a manner that ensures traceability and transparency of the funds and their allocation to green, social and sustainable activities.
  • Reporting – SA Taxi will report on the use of the proceeds from the offering, and the environmental and social impacts achieved. These reports will be conducted annually and will be made freely available on the company’s website.

In addition to mapping SA Taxi’s social framework to the components of the Green Bond and Social Bond Principles, S&P Global mapped the social framework to the United Nations’ Sustainable Development Goals (SDGs). The SDGs were established in 2015 as a global agenda to achieve sustainable development by the year 2030.

“When we were hired to arrange the bond offering, we convinced SA Taxi to prepare a comprehensive framework that would allow them to access the market repeatedly over time. Because of the comprehensive nature of a long-term, strategic framework, and the independent opinion on the framework, not just the bond, SA Taxi is able to go back to the bond markets again and again without having to create new criteria for each subsequent bond offering. Since the initial offering of R900m, SA Taxi has already been back to the market for another R500m offering [approximately $30m] under the same framework and opinion,” commented Anneke Lund, Executive Lead, Sustainable Finance, Standard Bank.

The use of S&P Global for the independent opinion was aligned with the goal of achieving validation from a well-known player in the international capital markets. Ms Lund continued, “Such an opinion is not necessary in order to bring a bond offering to market, and there are several competitors who provide similar services.”

ESG embedded in core culture

When asked if achieving the metrics laid out in the social framework is a burden to the company in terms of time, money and resources, SA Taxi CEO Terry Kier replied, “ESG elements are embedded into the core culture of SA Taxi. As such, maintaining the social requirements of the bond issuance occurs in the ordinary course of business with the oversight of our Investor Relations and Sustainability Manager.”

While some financing trends are fads, it appears that the global markets have aligned, and ESG financing is here to stay for the foreseeable future. African issuers, like SA Taxi, have much to gain by increasing the interest in their capital markets instruments, and thus reducing their cost of capital, while formalising, and seeking an independent opinion, on what they do already – contributing to Africa’s development.

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