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Africa: Giving the green light to green and sustainable finance – theory becomes reality

4 June 2021
– 7 Minute Read


Environmental, social and governance (ESG) initiatives are key market drivers for governments and corporate leaders, given the overwhelming need to advance sustainable investing.

One of the key parameters of the Paris Agreement is to reduce greenhouse gas emissions by 40% by 2030 to levels in the 1990s. This is only nine years away. In addition, ESG initiatives are being prioritised by the younger generation, both in terms of value-based investing and keen job satisfaction.

It has been rewarding to note that the international lending markets have embraced green loans and sustainability linked loans (SLLs). Over the past four years alone, the volume of sustainable finance has grown 15 times. Closer to home, green and ESG initiatives and the related financings are no longer a theoretical aspiration, but are very much at the forefront for governments, banks and corporates.

This newsflash highlights the ever-evolving nature of ESG considerations in the lending world.

What are green loans and sustainability linked loans?

Green loans are loans, the proceeds of which are used for a specified green purpose or project with clear environmental benefits. SLLs are loans advanced for general corporate purposes (and not for a specified environmental use) where the benefit of certain terms, is linked to the borrower achieving negotiated sustainability performance targets (SPTs)1.

The key characteristic of a green loan is its use of proceeds. The other specified core criteria set out in the green loan principles2 must also be met.

With SLLs, the focus is on incentivising the borrower’s efforts to improve its sustainability profile, by aligning loan terms to the borrower’s performance against mutually agreed, ‘ambitious and meaningful’, pre-determined SPTs.

These should be ‘ambitious and meaningful’ goals that are measurable targets to avoid the risk of ‘greenwashing’ (i.e.: setting goals, that if met, would not reflect a genuine improvement).

Examples of typical SPTs include items such as:

  • improvements in energy efficiency ratings;
  • reductions in greenhouse gas emissions (usually in production or manufacturing);
  • increases in the amount of renewable energy generated or used by the borrower;
  • water consumption reductions and water savings;
  • increases in the number of affordable housing units developed by the borrower;
  • increases in the use of verified sustainable raw materials/supplies;
  • circular economy and increases in recycling rates or use of recycled raw materials/supplies;
  • sustainable farming and food;
  • improvements in conservation and protection of biodiversity; and
  • improvements in the borrower’s ESG rating and/or achievement of a recognised ESG certification.

Factors driving growth

On 12 December 2015, parties to the UN Framework Convention on Climate Change reached consensus to combat climate change and intensify all actions and investments needed for a sustainable low carbon future, known as the ‘Paris Agreement’. This includes reducing greenhouse gas emissions by 40% by 2030 and becoming carbon neutral by 2050.

The EU Taxonomy has also been a key driver internationally. It effectively operates as a classification system designed, amongst other things, to:

  • create a uniform and harmonised classification system, which determines the activities that can be regarded as environmentally sustainable for investment purposes across the EU; and
  • provide all market participants and consumers with a common understanding and language of which economic activities can unambiguously be considered environmentally sustainable/green.

We understand that National Treasury is currently looking to implement similar measures in South Africa.

Furthermore, key loan organisations such as the LMA, APLMA and LSTA have jointly produced the Sustainability Linked Loan Principles and the Green Loan Principles. These are high-level market standards to promote the development and integrity of these loans by encouraging a consistent approach, while recognising, in particular for SLLs, the need for flexibility across sectors.

With governments and corporates embracing and adopting ESG principles, the banking market has recently seen a significant number of green loans and SLLs – which we anticipate will increase steadily across Africa.

Market developments

For many of our major clients, ESG and green finance is no longer a theoretical issue. Since 2019 there has been a marked increase in these financing transactions in South Africa.

For instance, we have been involved in a number of firsts in the market including advising:

  • Motus Holdings Ltd, a nonmanufacturing business in the automotive sector, on the first international syndicated sustainability linked loan to be implemented in South Africa. Motus agreed to reduce its consumption of fuel and water over a specified period in return for which it benefits from better pricing, provided it meets the pre-agreed targets.
  • Netcare Ltd on the first sustainability linked bond listed on the JSE. Netcare will benefit from a lower interest rate if it achieves the sustainability targets linked to the three-year unsecured note. These targets include reductions in energy consumption and total carbon emissions, procurement of renewable energy and improvements in water efficiency.
  • The City of Johannesburg Municipality in the listing of its first green bond on the Johannesburg Stock Exchange, where proceeds raised through the issuance were used to finance the City’s green initiatives.

Our expectation is that incorporating ESG-linked financing terms will become part of mainstream financing transactions in the near future. Developments in other markets, certainly point in that direction.

Given the flexible nature of SLLs, borrowers in other markets have also viewed SLLs as transition tools and have been more likely to take up SLLs than green loans as a first step towards sustainable financing.

Pricing and role players

Whereas the pricing on a green loan or bond is typically fixed, SLLs usually incorporate a margin ratchet which operates in conjunction with the borrower’s performance on pre-agreed SPTs.

The borrower benefits from a lower interest rate if it meets the SPTs in the given time-frame. In some instances, it may need to pay a higher margin if it fails to meet the SPTs. Testing of the borrower’s performance against the SPTs is usually done on an annual basis, with the pricing increase or decrease applying to the loan over the next 12-month period.

At present, anything between one and four SPTs are being agreed upon, with most funding transactions seeing the borrower commit to one or two SPTs.

Performance against the SPTs needs to be monitored and reported. Depending on the nature of the SPTs and the information available to assess these (e.g. utility bills), the borrower may be able to self-report. However, most funders will want a third party to verify the accuracy of such report or have a third party (such as an auditor or a specialist agency) perform both the monitoring and reporting.

Some SLLs include an ESG rating that needs to be achieved or maintained, with an external rating agency issuing a certificate on an annual basis against which the SPT is measured.

Depending on the size of the transaction and the number of credit providers involved, one of the financial institutions may act as a sustainability co-ordinator, with its role being to obtain all the relevant information to assess the borrower’s current ESG performance and develop the appropriate SPTs for inclusion in the transaction. The sustainability coordinator may also have an ongoing role in monitoring compliance and assessing the ESG-related reports provided by the borrower.


Companies are increasingly devising green and sustainable strategies, incorporating them into their business strategies and aligning their funding mechanisms to their green and sustainable development commitments.

Entering into a green loan or SLL in this context has a number of wide-ranging advantages for borrowers and lenders, such as:

  • building stronger, values-based relationships with shareholders;
  • having a positive impact on reputation and credibility;
  • incorporating ESG performance into lenders’ credit assessments;
  • enhancing a borrower’s ambitions on ESG performance;
  • engaging lenders to incentivise and support material sustainability improvements by actively directing capital towards borrowers implementing robust sustainability strategies;
  • showing commitment to achieve sustainability goals with a correlated economic impact;
  • promoting sustainable long-term growth and profitability; and
  • increasing ability to attract and retain staff who see contribution towards achieving the UN Sustainable Development Goals as an important part of their personal and working lives.


ESG and the related financing initiatives are having a significant impact on economies and the corporate world; and we anticipate that green loans and SLLs will continue to positively influence the public and private sector, enhance impactful corporate behaviour and encourage the introduction of new regulations aimed at improving sustainability. It’s an exciting time for the lending market, one that presents a wide range of beneficial opportunities for all members.