‘Bond vigilantes’: South Africa enters greener bond-market crosshairs

It is mandated by the Sustainable Finance Disclosure Regulation for European asset managers to categorize investments according to whether they are consistent with the goal of reducing global carbon emissions to zero on a net basis by the year 2050.

In South Africa, there is a looming environmental problem. When it comes to climate change, the Rainbow Nation isn’t doing much to mitigate the problem. Investors armed with a piece of European legislation began working on it on Wednesday, and it sounds like exactly the type of problem child they need.

Investors should be able to tell if a fund is truly green or not by comparing it to funds that invest in carbon-intensive companies. Alternatively, they may be referring to their preferred emerging market debt.

Unions and the ruling African National Congress have a long history of cooperation, which suggests that this won’t be changing anytime soon. Coal-mining jobs are at risk because of an anti-apartheid alliance formed during the fight against the apartheid regime. At a time when even China has pledged to decarbonize by 2060, President Cyril Ramaphosa, a former mining union leader, is yet to commit to some net-zero CO2 emissions goals,

South Africa is an outlier in terms of CO2 emissions, in large part due to the abundance of energy-intensive industries like mining, and the fact that 90 percent of the country’s electricity is generated from coal.

China’s $280 billion economy is the 12th-largest greenhouse gas emitter in the world, ahead of both Brazil and the United Kingdom, despite its relatively small GDP. According to the World Bank, emissions per unit of economic output are even higher in India than in China or the US.

South Africa is in a precarious position in this region. It has wide-open economic borders, a liquid currency, and substantial funding requirements.. Government debt totals $230 billion, with a third of that amount held by non-residents. Net-zero obligations entail significant political costs for Ramaphosa.

If South Africa is excluded from emerging market bond funds because of its non-green status, it could increase already high borrowing costs. Bond market green vigilantes could be a lot more damaging.

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