As African countries grapple with the measures necessary to meet their nationally determined commitments ("NDCs") under the Paris Agreement, it is critical to be primed to attract sustainable finance, and for central banks and regulators in each country to create a fertile environment for this redirection of capital. Africa, and small island nations such as Mauritius, are the most vulnerable to the impacts of climate change, but also offer huge potential for renewable energy.
Mauritius has committed to reducing its greenhouse gas ("GHG") emissions by 40% by 2030 and projects that this will require funding of USD6.5-billion. While USD2.3-billion (35% of the estimated requirement) will be provided by government and the private sector, USD4.2-billion must originate from the international community and donor agencies.
Recognising that sustainable finance can be a lever for change, the Government of Mauritius announced in its 2020/2021 budget that it intended to develop a green finance framework for the country. This includes a regulatory and supervisory framework for the issuance of sustainable bonds and green bonds. This is part of efforts by the nation to meet its NDCs and achieve the Sustainable Development Goals set out by the UN's 2030 Agenda for Sustainable Development in 2015.
Further to this vision, the Bank of Mauritius published the "Guide for the Issue of Sustainable Bonds in Mauritius" in June 2021 (the "BOM Guide") followed by the Financial Services Commission publishing "Guidelines for Issue of Corporate and Green Bonds in Mauritius" on December 23, 2021, as amended in April 2022 (the "FSC Guidelines"), to provide an overview of the requirements and process for the issuance and listing of sustainable bonds.
What is a sustainable bond?
A sustainable bond is a form of debenture used as a debt instrument of written acknowledgement of indebtedness, issued by a company to raise funding from investors. It falls within the definition of "securities" under the Securities Act, 2005.
Sustainable bonds support sustainable development by directing capital to finance or re-finance green, social or sustainability-linked projects, as set out in the BOM Guide. In addition to benefitting companies and investors, sustainable bonds, including green bonds, will foster the achievement of internationally recognised sustainability goals, such as those set out in the Paris Agreement.
To regulate the issue of these bonds, the FSC guidelines set out numerous requirements with the aim of promoting transparency, reporting and accountability in line with international best practices. The issuance of corporate and green bonds is not open to all corporate organisations, only those eligible as a result of meeting the necessary requirements.
Green bonds, like any other bonds, can be issued either through public offer or by preferential offer as in a private placement. Green bonds must be issued in the form of debentures with maturity dates of more than 365 days. The FSC Guidelines will only apply if the issue is of a minimum of MUR100-million or its equivalent and the minimum subscription amount must be MUR1-million for corporate or green bonds issued under preferential offer and MUR10 000 for corporate or green bonds issued through public offer. The coupon of the bond will be determined by the issuer taking into consideration the prevailing government bond yield curve and any other relevant market rates and risk premium.
To ensure integrity and that capital earmarked for sustainability has a real world impact, issuers must be able to demonstrate appropriate use of proceeds, have relevant internal processes for the evaluation and selection of green projects to be funded by the proceeds in accordance with an agreed framework, as well as the management of those proceeds.
This is in line with the green bond principles established by the International Capital Market Association. The issuer of a green bond would also have to appoint an independent external assessor to carry out a pre-issuance review, use of proceeds will be subject to audit and certification is required. An annual report on deployment of proceeds and their use is also applicable.
The offering documents of green bonds must be accompanied by a green bond memorandum as the main source of disclosure for issuers to demonstrate the greenness of their proposed projects and the principles applied.
These requirements are in place to avoid greenwashing, the making of unsubstantiated or misleading claims about the environmental benefits of a product, service, technology, or company practice.
It is critical that regulators do what they can to avoid greenwashing to ensure the integrity and attractiveness of the market and Mauritius as an investment destination for green and sustainability linked projects. This includes regulating disclosure obligations, providing taxonomies to impose clarity on subjective concepts such as what may be considered a "green" purpose in a particular sector.
Mauritian authorities are empowered by regulation to address non-compliance in respect of sustainable bonds. The Financial Services Commission may direct an issuer to remedy a contravention or take such measures as may be necessary to ensure that contraventions do not occur, or inflict sanctions such as the issue of a private warning or a public censure, or revocation of a licence. Further consequences may be imposed contractually, and in bilateral sustainability instruments, this could include an interest rate adjustment, mandatory repayment or declassification as a sustainability instrument.
While case law will still develop as the courts are appraised with these matters, it is also probable that greenwashing could also result in misrepresentation claims under the Securities Act, 2005 or a breach of directors duties. It is worth noting that principle 6 of the National Code of Corporate Governance, 2016 requires a board to present a fair, balanced and understandable assessment of the organisation's financial, environmental, social and governance position, performance and outlook in its annual report and on its website. This ensures that all companies (whether or not issuers of sustainable bonds) are doing what they say when it comes to claims of sustainability. Each organisation must ensure that it has done the necessary due diligence to support and substantiate any claim made in its annual report.
The way forward
Green bonds, while relatively new to the Mauritian market, have been evolving globally for years, with France being the largest sovereign issuer of green bonds in the world. One of the main reasons why the French are ahead of the game is because the government put into place a socially responsible investment label for ESG funds and the greenfin label for green funds. These labels contribute to increasing transparency and investor confidence, which is essential for the development of the green bond market.
Furthermore, France was the first country to introduce an environmental impact assessment of its national budget, highlighting not only the expenditures that are beneficial to the planet but also pinpointing those that are not. The Autorité des Marchés Financiers, France's financial regulator is very much involved in the development of the green, social and sustainable bond market, in particular by ensuring that investors are provided with transparent information on the allocation of the proceeds of these bonds.
The publication of the BOM Guide and the FSC Guidelines is undoubtedly a step towards establishing sustainable finance in Mauritius, which is a key concern for investors, issuers, and stakeholders in line with their ESG strategy and policy. It is undeniable that both the Bank of Mauritius and the Financial Services Commission, as the main regulators of the Mauritian market, have an important role to play in encouraging and accelerating transformation, while preserving the conditions for trust.
In practice, the first green bonds have been issued shortly after the publication of the FSC Guidelines by a non-banking financial institution in Mauritius for raising funds worth MUR3-billion over the next five years. This is promising to achieve the UN Sustainable Development Goals within the next eight years.
Should you have any questions regarding your sustainability plan, policy and strategy, ESG training, sustainable bonds, corporate and green bonds, or any related topics, please feel free to contact our multi-disciplinary ESG practice group.
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