IFC on green bonds, sustainability and SME funding in SA

FIFI PETERS: Our top story now is on what brings the International Finance Corporation to town. The IFC is here. As the financial lending arm of the World Bank they focus quite a lot on developing countries and helping them achieve their socio-economic goals, from providing their housing, healthcare, water and other facilities [and] more recently doing quite a lot regarding sustainability targets and reducing climate emissions. They have invested quite a lot in South Africa as well, in South Africa’s economy, working with various players in the economy.

We have the vice-president for Africa at the IFC, Sérgio Pimenta, physically in our studio. Sergio, thanks so much for taking the time to come and visit.

SERGIO PIMENTA: Thank you very much, Fifi. I’m very excited to be here.

FIFI PETERS: What brings you to town?

SERGIO PIMENTA: I’m back in Johannesburg after two years without coming. During the pandemic I didn’t have an opportunity to come back. I came here to see how the IFC – as you mentioned, the private-sector arm of the World Bank Group – can support companies in South Africa [more], particularly around the agenda of sustainability: helping them grow; helping them create new employment; and create new opportunities. So that’s why I’m here.

FIFI PETERS: How busy has your day been so far? I understand that you arrived yesterday and you’re seated here [now], suited and booted. So I imagine that there have been a number of meetings that you’ve had to attend to. How busy was yesterday? Whom have you seen, what have you spoken about?

SERGIO PIMENTA: Well, I’ve been quite busy since I arrived. I come here mostly to try and have as many interactions as possible of course with my own team, but more importantly with our clients, with our partners, to get both a sense of what’s happening in the country, where the challenges are, but also where the opportunities are.

So for instance this morning was very interesting. I went to visit a few of the projects that we’ve supported, including going to Pretoria to visit a very interesting project of student housing, with a company called Eris [Property Group] where the IFC has supported them and we financed them, so that they can provide student accommodation which, as you know, is something that is in very high demand.

I understand there are about 300 000 students in South Africa who don’t have access to proper housing for when they want to study – and if they can’t have accommodation, how can they go to university? So this is one of the projects I saw this morning, and I came back very excited with what we are doing, and I hope we can do even more in that space and support other companies and support Eris also as they expand more in that space.

FIFI PETERS: And as to the timing of your visit, you may or may not be aware that you come in a very important week for South Africa. Tomorrow our finance minister’s going to say a whole host of things regarding the budget of this country, where money is coming from and where money is going to by way of expenditure. Are you aware that your visit coincides with the upcoming Mid-Term Budget Policy Statement, and have you seen or are you planning to see the finance minister?

SERGIO PIMENTA: I am aware that this week these important meetings are taking place. I had the opportunity and the privilege to meet with the minister of finance during the annual meetings [when] he was in Washington a couple of weeks ago. We had an exchange, including about this visit. I did give him a bit of heads-up that I was planning to come.

But, as I mentioned, we do focus on the private sector. So while our discussions with the government are important in order to understand how the government is promoting private-sector development, and we can help them and advise them on these matters, at the end of the day our focus is going to be and is on financing and advising private-sector companies. So my programme this week is actually very focused on that and I’m mostly meeting both clients and potential clients, partners with whom we can work here.

FIFI PETERS: So the student housing you mentioned – that’s one of the areas that the IFC is focused on right now. I know that you’ve done work with other companies in various other sectors of this economy. Tell us a bit about that. But more importantly, I’m interested in how impactful this support that you have given has been so far, and how as the IFC you’re measuring progress at the stage.

SERGIO PIMENTA: As you mentioned, we have been quite present in South Africa.

Actually, today South Africa is our largest portfolio in the African continent. So this is the country where we have invested more funding. For instance, in the last fiscal year we have invested a little bit above half a billion US dollars. But we have a sizable portfolio here that we’ve built over the last few years.

We’ve invested over $2 billion, I think, over the last five years.

So it’s something that we’ve been really growing in terms of what we can do in South Africa.

We talk about dollars or rands, but what I like to talk about more is – as you were questioning me – the impact. Sometimes we do a small project that has a very large impact, and sometimes a large one might have a smaller [impact], because the capital needs can be different in different sectors.

So we’ve been deploying our funds in a strategy that is really to focus on areas where we can help create employment.

This is what I think the private sector can bring in an economy like[that] of South Africa. Therefore this has been really one of the areas that we’ve been focusing on, and we’ve done it through the different sectors that are present.

We’ve done quite a lot on the agricultural sector, particularly on the agribusiness and food transformation. South Africa already has a very strong economy on that front, and the potential to do even more. So we’ve been helping companies that add value in the country to develop the value chain, and then export goods or sell them on the South African market. So this has been one of the areas we’ve been focusing on.

We’ve also worked with some of the financial institutions, particularly on programmes to finance small and medium companies. This is one of the areas that we really want to focus on; employment comes generally from those type of firms and smaller ones. These are the firms that have the least access to finance.

So as the IFC we work through financial intermediaries, through financial institutions to give programmes so that these companies can be financed.

We’ve done, for instance, an interesting project a few years ago with Business Partners in financing a programme for women entrepreneurs. This is one of the segments of the population that we really want to support. We also have been quite present in sectors like infrastructure and sectors like health, education – I was mentioning the project that we visited this morning.

So we have quite a range of activities that we’ve been focusing on. The last one I would mention – if you allow me one more minute on this topic – is we have done a very interesting programme here around the development of some of the value chains on the industrial side, particularly around the automotive sector, where we look at some large companies that produce cars here. We look at their supplier chain and see how we can help that supplier chain grow and be more equipped to be able to sell products to these large manufacturers.

It is in this supply chain that you actually have a lot of employment creation, and not just employment but quality employment, so in skilled jobs.

That transfer of knowledge to these types of workers is very impactful, because they work in the value chain, but then they can evolve and do something else, go into another sector of the economy.

That’s the kind of support that we can do – not just with our financing, but with what we call our advisory services. We have teams who go and help companies improve their standards, improve their governance, improve how they work, so that they can then have a bigger impact on the broader economy.

FIFI PETERS: So hard and soft support, as it were. I think that the targeted focus on small business right now is probably music to the ears of a lot of the listeners of SAfm right now. A lot of small business [owners] listen to this show, and are probably thinking to themselves, my goodness, given the fact that access to finance is pretty difficult in this environment, how do [we] qualify and catch your eye? What are the criteria that you use in supporting a lot of these businesses?

SERGIO PIMENTA: The criteria that we look at in these businesses are mostly around what we call the broader sustainability of these businesses. So it’s not because a company is small or big that it’s more or less sustainable, but you need to look at financial sustainability. So we do look at some [of the] track record and how the operations have been conducted. And then we really want to accompany companies as they grow. So what is the growth plan of that company? What is the investment plan? What do they want to do? Do they need working capital? Do they need long-term financing? And we look at their needs.

We are a development institution, which is paying a lot of attention to all the environmental and social aspects of our operations, and the operations of our clients, so we want to make sure that company treats their employees in a fair way, that there’s no damage to the environment and, better than that, we do look at areas where environmental issues are actually an opportunity.

So how can we help you transition to being a greener company? …We have, for instance, programmes that support companies who want to get solar panels on their roofs so that they will have greener consumption of energy. This type of programme we’ve deployed in many countries, and this is something that we could also do in South Africa.

So we do look at the broader aspects of the companies in terms of economic and financial performance, environmental performance, social performance. And then we see whether our products are adjusted to their needs, because we provide mostly long-term finance. That’s something that we look at.

If the companies are of a certain size, we will work with them directly. If they are too small, we will very often prefer to work through one of these financial institutions with whom we work, but with whom we have precise programmes, so that we make sure that what they do with the funding we provide to them is consistent with our broader approach in those sectors.

FIFI PETERS: Like Nedbank? Just looking at the green bond that you worked with Nedbank on, you talk about green bonds and sustainability bonds etc. Have they met your expectations in terms of the initial vision of putting this financial instrument together, and the impact that it has had since it was issued?

SERGIO PIMENTA: Green bonds have a very strong impact if they’re done well. One of the aspects around green bonds that I think everyone has to pay attention to is [the] concept … of ‘greenwashing’. Oh, this is green, this is green – but you need criteria. What does it mean when we say that the bond is a green bond?

We have worked with regulators across many markets on exactly that, on making sure that the standards that are being followed are real standards of a project that have a real impact on the economy.

In the case of the bond that we did with Nedbank, the proceeds of this bond were used to greening construction, buildings. We all know that when we look at the impact on the environment of human activity, the construction sector is one, and the residences that we use, the way they are built and so on – this is one of the sources of bigger impact. But that is also the opportunity to reduce the impact. So if we build houses or renovate houses, buildings, in a way that reduces the consumption of energy, reduces the consumption of water, reduces the consumption of materials, we are having a huge impact on the environment.

That’s the work that we did with Nedbank, and we are very satisfied that we helped issue that bond. We were an anchor investor.

We provided $62 million, and with those funds the bank was able to launch a programme that is very impactful in terms of improving the construction sector in South Africa.

That’s something that we are very proud of, and we are very happy with the collaboration that we have with that bank.

FIFI PETERS: Sergio, as you said, it has been two years since [you were last] in this country. A lot has changed for the good and perhaps for the not so good. But as an investor in this country right now, what is your read on how the economy is doing and how the recovery from the pandemic is transpiring? I ask this against the backdrop that you ask a lot of private-sector individuals, CEOs, company owners, about doing business in South Africa, and it’s difficult to find a handful of those who are confident, given some of the challenges that they continue to cite around doing business, the slow economy that’s not growing to the full standards, and some things that they don’t like about the policy environment and the regulatory environment – a whole host of issues. What’s your take on the South African landscape now?

SERGIO PIMENTA: Fifi, as you said, it’s been two years. South Africa has changed, the world has changed. We are in a very different world than we were in, in 2020. And I think it’s important to realise that the world in which we operate has a higher level of uncertainty. I don’t know if we have come out of the pandemic yet, but we are hopefully coming out of a pandemic that had a huge impact – not just on health, but on economies across the world. We have the war in Ukraine, we have a lot of inflation. We have a lot of factors that are beyond the control of any individual government or individual group. These are global factors that are impacting all of us.

The impact on South Africa of all these factors is real. In South Africa in 2020, when we got into these difficult times, there were already a certain number of challenges in the economy that needed to be addressed. So the question is where are the solutions and how are we going to implement them? I do represent the IFC, the private-sector arm of the World Bank Group,

but I do believe – and you might think I’m biased in this – that there’s a big consensus that the solutions, the development needs, will not be covered only by public-sector solutions.

Whatever budget discussions that the government is having at this moment, no government in Africa or around the world, to be very fair, has the ability to say, okay, these are the development needs of my country and I can cover all of this with public funding. That is a fact.

So we need to bring in more private sector, and to bring in more private sector there are certain things [where] we can all help. As a development financial institution, the IFC can help in sort of de-risking some of these projects, by providing longer-term solutions, longer-term financing, where companies would be more comfortable that okay, with the overall risk environment in which we are, if I have IFC as a partner, I will make this investment because I know that I have a partner that will stay with me for a long time.

We provide solutions. We have instruments, for instance on the climate side, [where] if you make an investment that has a strong climate component, we can bring some forms of subsidies to sort of de-risk the overall projects a bit. So that kind of approach, that’s something that we need to push forward.

I know that South Africa is embarking on a certain number of reforms. Everybody’s talking about the fair transition on the energy side.

For all these aspects there’s going to be a significant need for funding, for investment. And the IFC, the World Bank Group, are ready to support. This is what we have been doing and we want to do more.

FIFI PETERS: I think we all desire a partner who will be with us through thick and thin, as you are alluding to. But right now … there’s a lot.

One of the other issues that we didn’t cover is the energy crisis in this country, the load shedding. … It is a serious issue in the sense that it [impacts] everyone. It makes everyone’s life difficult, including some of the companies that you’re currently supporting. It even makes growing the economy to its full potential pretty difficult.

What do you make of the energy crisis in South Africa and what role are you looking to play in it?

SERGIO PIMENTA: Energy is almost the blood of the economy. You do need power, not just to produce goods and produce services, but for kids to go to school, for hospitals to run. It is extremely important.

And when you look at power generation in South Africa, there is an obvious need, for environmental reasons, to take a more sustainable path.

I think the government has announced a certain number of reforms, certain changes, certain measures – and I think this is going in a good direction. But, as I was saying earlier, the funding needs will be significant.

I think our role is to support that transition as much as we can, not just with our own funding, but also as a mobiliser, an aggregator. A lot of institutions that have long-term funding could be interested, and coming and financing some of these projects [to help] this transition. I think this is the role that institutions like ours can play, and we are keen on doing this.

FIFI PETERS: Yeah. Even … supporting Eskom, is this something that comes up in discussion?

SERGIO PIMENTA: Eskom plays a key role in this sector, so I don’t think you can have a discussion on energy without having a discussion on Eskom. It’s very much linked.

FIFI PETERS: Sergio, thanks so much for your time. I’ve a lot more questions but not enough time. Next time, I suppose. Sergio Pimenta is the vice president for Africa at the International Finance Corporation.