SIMON BROWN: I’m chatting now with Craig Ivy, investment analyst at Futuregrowth [Asset Management]. Craig, I appreciate the early morning time talking green bonds. I want to get to the home-loan part, but we’ll get there in a moment. Green bonds – when people hear that, they are typically going to think ‘renewable energy’, maybe ‘water’. Is that typically the sort of investments we are going to be talking around when we talk around green bonds?
CRAIG IVY: Morning, Simon. Thanks for having me. Yes, I think that’s mostly what we see coming through to the market on the bond side. Obviously from the institution side we see a lot of the money going to the bigger corporates at the moment. There have also been some social-development bonds coming through, but largely I think it’s around renewable energy. That’s where the key focus seems to be at the moment.
SIMON BROWN: And banks. The process typically is banks going to market with a green bond, raising cash, and then essentially loaning it out into industry. As that demand starts to increase, as we see more people interested in (a) lending to the bank and buying the bond and (b) the demand for the cash, we start seeing an increased demand and ultimately an improved cost of funding.
CRAIG IVY: Yes, that’s what we think is going to happen. I think from the investor side [one of] the two benefits that you get is [that] there’s now a lot more transparency that you see coming through. Previously a corporate would borrow money and then it would be used for general corporate purposes. Now the banks actually have some disclosure, so they say that the proceeds being raised are going to this project, this renewable project, and they’re providing annual disclosure. The corporate that’s borrowing the money now has disclosure requirements. So I think that is the one aspect of it.
I think the other aspect of it is that other investors that are not able to invest directly in renewable projects, like we can at Futuregrowth, this might be an option for them, because the funds are ring-fenced [and] directly used for those products. You have the available disclosure. So I think those are maybe the two things from the investor side.
And then I think from the corporate side the point that I’m tried to highlight is that, with the increased cost of electricity, corporates could now be incentivised – if you offer them lower funding – to take out a bond for solar panels, for example, or for example even a home loan.
You used to see people just taking out the home loan. Now, if the banks could incentivise them to take out also an additional part for solar panels or a water-reticulation system, I think there could be a big market there.
SIMON BROWN: That’s a point that really struck me. If you want to do solar, whether it’s off-grid or grid-tied, or maybe you’d just want some battery backup for the load shedding, most people are going to have to raid their current bond, perhaps get some cash out of that [or] maybe their credit card. But it depends on size. You are saying banks could actually get quite smart with this and say to folks, ‘You’ve got your home loan with us, take a separate green bond for that solar on the roof, that battery backup,’ and create a market targeting the greening of retail houses via home loans. Potentially this could be at a better rate than your home-loan rate.
CRAIG IVY: Yes. That’s what we were thinking; that’s really the benefit. I think that, [with] the banks starting with the corporates, you’re getting the suppliers on board, you’re getting the partners on board, you’re understanding the pricing points, what investors are looking for. And I think that could be used and filtered down to the ordinary person with the home loan.
But the point that I also try to make is that it’s potentially a big market out there, and if you think about it, the banks just tapping into an existing equity on a home loan, that’s a big market without an additional credit loss that could come into the system, because it’s just a touch onto the existing home loan.
I think that [it] is in process. They are thinking about it. It’s just about getting enough data to eventually create a marketplace for this. By connecting the retail customer to the preferred supplier, you are … giving them comfort that the loan is actually being used for the correct thing.
SIMON BROWN: Yes, I like that point. And I take your point. It’s actually cheaper and easier for the bank, because they know the customer, they’ve done the due diligence. The customer has been paying the bond. They’ve got that property. And the numbers that you run – if [it’s] only 5% of the South African retail market which uses such a product, that then creates a R50 billion market, because of course home loans are sitting at, what, R1.1 trillion and some change.
Craig Ivy, investment analyst from Futuregrowth, I appreciate the early morning time.
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