Climate Finance: Four ways Africa can secure this new wave of financing
This article first appeared on the FSD Kenya blog on October 28, 2021.
The Covid-19 pandemic has raised the profile of climate finance globally adding momentum to the $100 billion in climate finance that was promised by rich countries in 2009. However, the health and socio-economic impacts of Covid-19 has seen some climate finance topics (for example, climate mitigation and environmental sustainability) fall down the political agenda at all levels of governance and certain types of climate finance planning (adaptation -focused) at the global, national and local levels have seen large proportions of the human and financial resources (including bilateral and multilateral support) previously earmarked for them being reallocated towards efforts to manage the impacts of the virus.
That said, as COP 26 gets underway, it is clear that climate finance is getting increased attention and Africa can find ways to leverage it to not only play a role in recovering from Covid-19 but also speak to the continents’ development priorities. The International Monetary Fund (IMF) estimates that sub-Saharan Africa loses of over $520 million in direct economic damages annually as a result of climate change and the cost of implementing the continent’s response to climate change is estimated at between $7billion and $15 billion annually, and projected to rise to $35 billion per year by 2050 under a business-as-usual scenario. In Kenya alone, the government anticipates the need to invest approximately $8 billion over the next 10 years to implement the Nationally Determined Contributions (NDC) commitments alone. There are already emerging dynamics in climate finance of which Africa should be aware and manage if the continent is to leverage the growing pool of money tagged with climate finance objectives. Several biases are already emerging in how climate finance is being structured that risk locking out the continent from fully benefitting from climate finance.
Firstly, climate finance is heavily biased towards financing mitigation rather than adaptation, which is Africa’s priority given the continent’s high levels of vulnerability to climate change and climate variability and low emissions associated with low levels of modern economic development. Adaptation is defined as the process of adjustment to actual or expected climate change and its effects; mitigation is a human intervention to reduce the sources or enhance the sinks of greenhouse gases. Research by the OECD indicates that only about 19% of all climate financing mobilised by richer countries (between 2013-18) is adaptation focused, sourced almost entirely from public sources:
Source: OECD, 2020
This poses challenges for Africa, the first being energy security. Divestment from financing fossil fuels as a mitigation measure may hurt the continent’s economic prospects. Yemi Osinbajo, the Vice President of Nigeria makes the point that a growing number of wealthy nations have banned or restricted public investment in fossil fuels, including natural gas. Sadly, such policies often do not distinguish between different kinds of fuels, nor do they consider the vital role some fuels play in powering the growth of developing economies, especially in sub-Saharan Africa. He points out that a blanket ban on finance for all fossil fuels would jeopardize objectives to deliver electricity to Africans, many of whom still use charcoal, wood fuel, dung, and kerosene. Secondly, from a livelihood perspective, Africa has a deep need for adaptation financing to support incomes derived from natural resources sectors such as agriculture, forestry, fishing, livestock and tourism. The UN is of the view that 50% of the total share of climate finance be spent on building resilience and adapting to the effects of a warming world.
Secondly, climate finance products are very formal, structured products that will not meet the needs of a private sector dominated by SMEs and informality. According to the Africa Development Bank (AfDB) small and medium sized enterprises (SMEs) account for more than 90% of businesses and almost 80% of employment on the continent. This mismatch will narrow the scale of meaningful engagement between climate financiers and private sector players who may not have the capabilities or incentives to meet stringent climate finance requirements.
This leads to the third point; due to the factors mentioned above as well the relative inexperience of financial service providers on the continent in deploying climate finance solutions, there is a high-risk perception linked to climate/green finance solutions. This is producing high premiums and increasing the cost of capital for climate finance. This is a lived reality that disincentivizes private sector from taking up these solutions, particularly given the extra financial and technical costs linked to complying to due diligence and reporting requirements linked to climate finance.
Additionally, there is a general lack of clarity on climate finance standards, compliance and reporting which often have a global North bias. The multiple standards such as TCFD, TNFD, SDG reporting etc. make it difficult for African players to understand which standards to adopt and resource in terms of ensuring compliance. Further, there seems to be a prioritisation of mitigation in some leading standards more focused on carbon exposure and transition risks with adaptation strategy under-emphasised. These issues also show up in niche areas such as carbon pricing. Ngozi Okonjo-Iweala, the Director-General of the World Trade Organization points out the inconsistency of carbon pricing systems and that border carbon adjustment could become a pretext for protectionism aimed at exports from regions such as Africa. The combination of numerous (often competing) standards, biases that favour richer economies and the lack of an inclusive common framework on standards may limit the ability of African players leverage climate finance opportunities that speak to their reality and priorities. Indeed, as Chukwumerije Okereke (Director of Centre for Climate Change and Development) bluntly states, a landscape of loosely defined, fragmented, unpredictable and opaque climate finance will not foster the end of climate insolvency in Africa but could rather impose new risks on all.
That said, the momentum to deepen climate-tagged resources is only growing. There are indications that governments of wealthier countries are consolidating their climate funding within their overseas development aid (ODA). This means climate funds are increasingly dislodging humanitarian and development budgets normally used to respond to disasters or relieve poverty, rather than adding to existing aid. The Center for Global Development points out that aid finance actually used in developing countries for non-climate activities fell by about $9 billion between 2013 and 2018 and that climate finance is not additional but displacing finance for other objectives.
Given this background, there are key actions African players, led by governments, can do to leverage climate finance towards the continent’s development objectives. The following is a good place to start:
Build out National and Sub-National Climate Finance Infrastructure African governments should continue to be proactive in building out the financial structures and budgeting processes that allow them to qualify for, attract, deploy and report on climate finance. This must include structures at the subnational level that direct finance to all parts of the continent and enable an equitable and community-driven action on climate change informed by local realities and with resources managed in a transparent and accountable manner. FSD Kenya is already actively working with the Kenyan government at both National and sub-national levels, particularly through supporting the creation and development of County Climate Change Funds (CCCFs).
Develop climate finance policies focused on the financial sector Kenya is leading the way here with the enactment of its Climate Finance Policy of 2018, which seeks to position the country to better access climate finance through a variety of mechanisms. Recently, the Central Bank of Kenya issued Guidance on Climate-Related Risk Management to commercial banks and mortgage finance companies. The Guidance is intended to enable banks integrate the opportunities and risks arising from climate change in their governance structure, strategy and risk management frameworks. Further, it will guide these institutions in disclosing climate-related information to their stakeholders. The importance of such action cannot be overstated as it updates the African financial sector to global realities, enabling the sector to develop capabilities that allow it be part of the solution of making African economies more climate resilient given their important role as holders, allocators and conduits of liquidity. Other early movers in this space are Nigeria, South Africa, and Morocco.
Be deliberate in developing Transition Facilities to engage real economy players As mentioned earlier, the presence of numerous standards, the lack of familiarity with climate finance products, the stringent due diligence and reporting requirements and the ‘climate finance premium’ prevent most of the African private sector from taking advantage of climate funds. Further, significant technical and financial resources are required to understand, qualify for and comply with climate finance requirements which is leading to a concentration of players that are conduits for climate finance; this facilitates elitism and exclusion in climate finance. This can be addressed by identifying and working with the growing pools of climate finance experts in Africa to work with real economy players. This can start with larger firms and corporates to develop transition plans, build the due diligence, measurements and reporting infrastructure and capabilities to foster climate leadership and innovation in the private sector. Such transition facilities can be financed by African governments, bilateral and multilateral donors, impact investors and even climate financiers themselves to build credible pipelines of visible and bankable climate finance projects in Africa.
Create an ecosystem of research and development in climate finance data management, measurement and reporting A fundamental bottleneck to tapping into the climate wave is the lack of climate finance data capabilities. There is no ecosystem of climate finance data collection, analysis, measuring and reporting that would enable climate financiers to track their money from the institution to the point of impact in Africa. This opacity discourages climate financiers who want to demonstrate their commitment and not be seen to be ‘greenwashing’. This can be solved, again, by commissioning climate finance experts in Africa to identify and develop climate related data abilities unique to their economy and environment. This would include sector foci such agriculture, mining, forestry, energy, tourism, water etc and the integration of appropriate/ relevant climate finance data tools at the sectoral level. Both private sector and governments ought to be engaged to use and customise data tools in a manner that meets global requirements but is anchored in local realities.
Academia, research bodies and African think tanks are a key part of this ecosystem because the technical requirements regarding data from different stakeholders is varied and niche and requires constant updating and localisation. The Research and Development that integrates digital tools in climate finance data in Africa will be foundational in enabling African governments and private sector to truly scale in their ability to consistently attract, retain, deploy, customise and report on climate finance.