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

The Sustainable Finance Disclosure Regulation requires European asset managers to classify funds based on whether they have investments that align with the objective of reducing global carbon emissions to zero on a net basis by 2050.

South Africa has a looming green issue. The Rainbow Nation has a big carbon footprint and limited plans to alter. It sounds like the sort of problem child that investors armed with a piece of European legislation started on Wednesday, will soon take to work.

Making it easier for investors to see which funds are genuinely green or not should incentivize managers to move out of carbon-heavy companies’ equity and corporate bonds. But it could also apply to which emerging market debt they prefer.

The intimate connection between unions and the ruling African National Congress implies that may not change any time soon. That alliance, forged during the struggle against apartheid, precludes decisive action on climate change because of fear it will cost coal-mining jobs. President Cyril Ramaphosa, a former mining union leader, is yet to commit to some net-zero CO2 emissions goals, at a time when even China has vowed to decarbonize before 2060.

When it comes to CO2 output, South Africa is an outlier, largely because it has plenty of energy-intensive industries like mining and 90 percent of its power comes from coal.

Despite standing from the mid-30s in terms of global GDP, it’s $280 billion economies are the 12th largest greenhouse gas emitter, ahead of Brazil and the United Kingdom. Concerning emissions per unit of economic output, it’s even higher — and worse than China or the United States, according to the World Bank.

It’s a dangerous place for countries like South Africa to be. It’s open economic borders, a liquid currency, and hefty financing needs. And the government leans heavily on foreign funding: outsiders hold a third of its $230 billion of national government debt. For Ramaphosa, net-zero obligations carry big political expenses.

However, if non-green status sees South Africa excluded from emerging market bond funds, it could hike already high national borrowing costs. Falling foul of the bond market’s green vigilantes might be more painful.

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