THE SOUTH AFRICAN TREASURER: NEXT GENERATION TREASURY

TMI | THE SOUTHAFRICANTREASURER 23 NEXT GENERATIONTREASURY This newmarket is extremely important andwill start taking centre stagemore andmore. CRAIGWILLIAMSON Founder and Director, Bastion Advisory (Pty) Ltd CraigWilliamson is a founder and director of Bastion Advisory (Pty) Ltd. (www. bastionadvisory.co.za) Bastion is an independent treasury and financial markets advisory firmsupporting South African corporations. He is a chartered accountant by profession and has worked in the African financial markets industry for more than 25 years. He has workedwith corporations, advisors and banks during this time. Craigwas previously head of the RMB Fixed Income, Currency and Commodity Corporate Solutions desk from2008 to 2015. Until the end of 2018 hewas the Head of Financial Markets for Southern Africa at Standard Chartered Bank. 2. The agencies that measure and approve the carbon offset i.e., the amount of GHGs that have either been removed from the atmosphere by the forestry type projects or the amount of GHGs that have been prevented from entering the environment through energy efficiency projects. This measure and verification process is extremely onerous and costly for the producer, adding another layer costs to the production of the carbon credits. Carbon credits are not represented in value by a physical asset or liability such as any financial instrument or commodity. As a result, the detailed regulation of this aspect of industry is crucial to its success and building trust between buyers and sellers. It is not dissimilar to a corporation’s audit by an audit practice. The audit gives the shareholders confidence in the value of the shares that they own. The intermediaries Any activemarket needsmarket-makers and financiers to bridge the gap between the buyers and sellers.The intermediary market is currently performed by a range of independent brokers, banks and independent finance houses.This is not dissimilar to anymarket that operates globally. 1. Themarket-makers are actively looking tomatch buyers and sellers of verified carbon credits.They are typically brokerages, banks and often the trading arms of large emitters internationally. Theymay purchase ‘stock’ of carbon credits from the producers at agreed prices with the viewof on selling them later when prices have risen. 2. The financing activity is nascent but is happening in three predominant ways: a. The buyer agrees with the seller (via an intermediary) to pre-pay for a guaranteed offtake of carbon credits over a three- to five-year period.The pre-payment of the carbon credits is at an agreed and set price, which removes delivery and price risk on carbon credits from the buyer.This upfront payment allows the producer of the credits to invest sufficiently in one of the activities described above tomeet the buyer’s requirements to harvest carbon credits. b. A carbon producer may enter into a long-termoff-take arrangement with a buyer of carbon credits for agreed volume at an agreed price. A bank or other financial institutionwould effectively discount this off-take contract and provide the producer with a percentage of the off-take agreement. Again, this funding would facilitate investment into one of the activities above. c. Direct environmental and carbon focused investment issues in two manners: firstly via funds with mandates to invest directly in carbon offset projects and companies that are beginning to show an interest in this sector. Secondly, providers of capital are offering cheaper capital to corporations that can demonstrate a commitment to zero emission policies. The working capital cycle for the ultimate production of verified carbon credits is extremely long.Thismakes its financing extremely important.The reader will recognise that environmental projects will take 5 – 10 years to demonstrate the effective carbon removal from the atmosphere. The projects that reduce the reliance on fossil fuels for energy can showbenefits in 18-24months.These both represent long periods of time for the producer of carbon credits to operate without sufficient funding, especially for those projects that are driven by NGOs (non-governmental organisations). This area remains one of the greatest challenges to the industry. Conclusion This newmarket is extremely important and will start taking centre stage more andmore. It may be natural for corporate treasurers and finance executives to pass these responsibilities on to ESG and CSI teams within their organisations. However, this article should demonstrate that this is in fact a new financial market where the risks, costs and rewards need to be accurately measured andmanaged. n

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