Johannesburg Stock Exchange: introduction of sustainability-linked debt and bridging debt instruments

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introduction

The South African Financial Sector Conduct Authority released for public comment on September 23, 2021 a proposal for the Johannesburg Stock Exchange (JSE) to amend its listing rules to provide for the introduction of sustainability-linked debt securities and securities. of bridging debt. The consultation procedure has now been completed.

Characteristics

According to the JSE, sustainability-linked debt securities are forward-looking, performance-based debt securities whose financial and / or structural characteristics may vary depending on whether the issuer achieves predefined sustainability and / or ESG objectives in accordance with standards. linked to sustainability. The JSE rules already provide for “sustainability instruments” whose proceeds are used for sustainable activities or projects. However, these will be renamed to “Sustainable Use of Debt Proceeds” to align with its sustainability goals.

The objective of the transitional debt securities is to raise funds for purposes related to the climate transition. Transitional debt instruments can take the form of sustainable use of debt products or sustainability debt instruments.

The JSE observes that the inclusion of sustainability-linked debt securities will broaden investor choice and provide candidate issuers with the opportunity to increase their participation in the broader impact and sustainability markets. These securities will allow issuers to be rewarded for improving certain ESG indicators, even if they do not have a specific plan for allocating the raised products. The listing rules refer in this regard to:

  • the Principles of Sustainable Development Obligations prepared and published by the ICMA; and

  • Guidelines for External Reviews of Green, Social, Sustainable and Sustainability Bonds prepared and published by ICMA.

Transitional debt securities will allow issuers to raise capital to support their transition strategy and decarbonization commitments. They considered it to be a key tool towards a carbon-free economy and alignment with the Paris Agreement. The Climate Transition Finance Handbook prepared and published by ICMA is used as a reference guide for these debt instruments.

New market segments

The JSE will also establish two new segments to accommodate these debt securities:

  • a sustainability segment comprising the sustainable use of the products of debt securities and sustainability-related debt securities; and

  • a Transition Segment comprising transition debt securities.

Comment

The inclusion of the new categories of debt securities and their respective market segments is an important addition to the range of securities that may be listed on the JSE. The creation of rules applicable to these instruments, and in particular their sustainability characteristics, will ensure that they meet international sustainability standards and reduce the risk of “greenwashing”. Both sustainability debt and bridging debt could be an attractive source of finance for South Africa’s industrial, agricultural and energy sectors. Given the current focus of local and international investors on sustainability, it is likely that the inclusion of sustainability criteria in the terms of debt securities will become a requirement rather than an option.


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