Is ESG really adding value for South African Listed and Private Credit Investors?

ESG (Environmental, Social and Governance), a buzzword in recent years, is currently undergoing some changes. There has been a notable retreat by US investors from ESG, with US sustainable funds experiencing net outflows over 12 consecutive quarters, according to a recent Morningstar Sustainalytics report. This investor shift is partly being driven by Trump’s growing anti-woke and anti-climate change sentiments. While the US pulls back on ESG, European investors seem to be doubling down on their commitments. Vukile Themba-Mketo, Senior Portfolio Manager Private Debt, and Oyena Mtuzula
Head of Listed Credit and ESG Analyst, Terebinth Capital unpack this issue in more detail.

Despite the divergence between Europe and the US on ESG issues, the importance of ESG continues to grow within South Africa. The fiduciary duty Regulation 28 places on trustees to follow a responsible investment approach and consider all factors that affect long-term sustainable performance suggests that ESG is not just a buzzword, but an investment imperative. However, the question remains: is it really adding value for listed and private credit investors?

ESG in Private Credit: Deal specific with a focus on outcomes and risks

Private credit funds in South Africa largely provide customised growth, acquisition or working capital debt financing to mid-market private businesses. Funding is provided directly to borrowers and not through intermediaries. Although private credit funds do not become shareholders, they have close and direct contact with shareholders and management teams throughout the due diligence process and the life of the investment. This proximity allows for detailed and deal-specific assessment of ESG risks and opportunities, ongoing and meaningful engagement, and the ability to influence better ESG-related outcomes. 

For instance, private credit funds can reward borrowers with a lower cost of funding should they meet certain social outcomes, such as jobs created over the life of an investment. Because the tenor of a private credit loan typically ranges from three to five years, this outcomes-based ‘carrot’ approach can influence key business decisions and shareholder behaviour over the medium term, making outcomes far more sustainable and effective as opposed to outright exclusions.  

Fraud is becoming a growing and pervasive ‘G’-related risk. In September 2025, Tricolor, a US-based lender providing car loans to individuals with poor or non-existent credit history, filed for liquidation amid fraud allegations. This corporate action amounted to a default, causing financial institutions such as Barclays and JP Morgan Chase, that had funded Tricolor, to declare losses. While fraud can be a complex risk to manage, the requirement that private credit funds have to receive bank statements as part of their ongoing monitoring of borrower performance can assist in early detection. The security-backed nature of private credit loans, the ability to hold bonds over physical assets that can be realised, and sufficient portfolio diversification help to minimise losses should a fraud-driven event of default occur. 

ESG in Listed Credit: Putting money where the ESG is

Within the South African listed credit market, ESG has been observed to be value-adding, with the extent of the benefits depending on market dynamics, issuer transparency, the specific ESG factors that are prioritised, and the approach as well as depth of analysis applied. ESG integration has become an essential component of analysis and is increasingly embedded in South African fixed-income markets. Evidence and market trends indicate that ESG considerations may help mitigate credit risk, but the advantages are not uniformly distributed. Key themes in the South African market frequently pertain to governance and social risks, such as power reliability, state-owned enterprise performance, labour disputes, and policy uncertainty, which are often more significant to credit assessments than purely green considerations. Locally, cases such as SA Taxi also highlight how social and operational vulnerabilities can escalate into full credit deterioration when not properly monitored.

ESG analysis initially gained momentum in the equity market, where the focus was largely on how ESG considerations affected brand, revenue growth, and long-term competitiveness. Over time, however, it has become clear that bondholders, as capital providers, hold significant influence in shaping behaviour and assessing long-term risk. In the credit market, ESG plays a fundamentally different role than it does in equities. For bond investors, the focus is on how environmental, social and governance factors may alter a borrower’s cashflows, refinancing prospects and probability of default.

Integrating in credit assessments

Several analytical approaches can be used for integrating ESG into credit assessments. Investors can apply an ESG overlay to their traditional credit process or incorporate ESG factors directly into valuation models, alongside deeper issuer-level ESG analysis. Bondholders can also express their preferences through participation in green, social and sustainability-linked bonds. These labelled instruments are increasingly relevant for institutional, professional, and even retail investors seeking both financial returns and measurable impact. Effective ESG integration in credit begins with understanding the specific risks an issuer faces and assessing how well equipped the company is to manage those risks. 

A key question often raised is whether issuers with stronger ESG credentials benefit from meaningfully lower yields or tighter spreads. To date, global research has not established a consistent correlation between ESG ratings and bond pricing. Locally, the South African market shows no clear evidence of a persistent ‘greenium’ (a pricing premium for green or sustainability-linked bonds). This also reflects structural factors such as limited liquidity, small issuance volumes, and the small size of the domestic ESG-labelled debt market relative to the broader bond universe.

ESG has proven value in both private and listed credit

Overall, ESG integration can help uncover overlooked risks that have the potential to widen spreads or increase default risk. ESG integration can also identify undervalued credit drivers and promote positive sustainability outcomes. While the jury is still out on whether ESG factors enhance returns, it is clear that ESG has an ability to drive impact and is a non-negotiable when it comes to risk management.